The U.S. and China are equally at fault. They have a co-dependent relationship. U.S. consumers want to consume. China needs to keep hundreds of millions of people busy, employed, happy, and believing in slogans like "Without the Communist Party, there would be no New China." China is the United States' enabler. It grabs farmland for a pittance and sells it to a factory on the cheap. Workers flock to the factory gate, thrilled to work for the equivalent of $100 a month because it's boring back in the village. (See last year's book, Factory Girls, for an up-close look at the girls who make the stuff.) The workers routinely have a couple of months pay withheld that they forfeit when they "jump" to another job.
When stuff is cheap, Americans buy even when they don't need stuff. They are happy to pay with worthless pieces of paper. The paper has been piling up rapidly. In 1990, China had the equivalent of $10 in foreign exchange reserves per person. It was up to $166 in 2001, when China joined the WTO. The total went up over $300 per person last year and is now up to $1,465 for every man, woman, and child in China. The total reserves are $1.95 trillion, the largest in the world. Much of it is parked in U.S. Treasury Bills. They also had money in Fannie Mae, Black Rock, J.P. Morgan, and who knows what else. Here's some irony--I understand China has been the major buyer of securities that fund the U.S. farm credit system--Chinese money is keeping interest rates for big American farmers low at the same time less than 9% of Chinese farmers are able to borrow money.
All these dollars flowing into U.S. credit markets mean low interest rates for Americans. Greenspan has been defending his record by claiming that long-term interest rates didn't budge when he tried to push up short-term rates--the Fed lost control of interest rates. The flood of capital was a major reason behind this phenomenon.
The policy prescriptions now are calling for more of the same. Americans--consume more! borrow more! The surge in Chinese bank lending is taken to be a sign of strength, but China's problem is lack of demand, not lack of credit. Chinese authorities are trying to keep more money at home, but demand remains weak. They are subsidizing rural consumer purchases, but there's just one problem--rural incomes are low and likely to fall this year as farm prices fall, input prices rise, and migrant jobs dry up. Now Chinese exporters are calling for devaluation of the Chinese currency--good news is that China's monetary officials may hold the line on the exchange rate. A devaluation probably wouldn't help much, competing countries would devalue to match it, and a devaluation would draw the ire of the U.S. and E.U.
What can break the spell? How can we wean the American consumer from his/her consumption addiction, yet get production going in the U.S. economy? How does China keep all those people employed? Sorry, no answers here...
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