More on the United States of Gordon Gekkos

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

James Fallows wrote this in the Atlantic's January 2008 issue. Why is this relevant in the contemporary economic context? Fallows wrote there that

For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden.

Still unclear? More from Fallows:

The billions of dollars China pumps into the United States each week strangely seem to make it harder rather than easier for Americans to face their own structural problems. One day, something snaps. Suppose the CIC makes another bad bet—not another Blackstone but another WorldCom, with billions of dollars of Chinese people’s assets irretrievably wiped out. They will need someone to blame, and Americans, for their part, are already primed to blame China back.
So, the shock comes. Does it inevitably cause a cataclysm? No one can know until it’s too late.

Well, does this set up the context well for Daniel Gross' and Tyler Cowen's comments that I earlier blogged about?
Further, the Chinese money is not only one source. There are other foreign investors too. So, when Paulson worries about restoring confidence in the American financial sector, I bet he is equally concerned about making sure that foreigners will continue to pump money into our system. More so when the current account deficit is at 5.1% of the GDP! To quite an extent, our financial health is beginning to resemble that of a stereotypical Third World country!!!

Which is why I am all the more convinced that the subprime mortgage issue was only a symptom of the much bigger problems. Even the problems with all the regular mortgages are symptoms of these larger problems. So, it bugs the crap out of me when pundits who are even less qualified than me on this topic proclaim that we need to address the housing industry issues first. Hello?

Ok, back to working on the syllabi ....