Thursday, July 21, 2005

China has us by the short ones

China has finally decided to stop pegging their currency to the dollar. For years, China has undervalued the Yuan, making Chinese goods cheap. So our trade deficit with China is gigantic. China is sitting on a huge pile of US Dollars. What do they do with it? They loan it to us. They buy our debt, which finances our deficit spending, and helps keep interest rates low, which supports values in the housing market, which in turn has supported consumer spending, which has stimulated the economy. (We don't really put away any savings in the US. We count on the unrealized appreciation of our homes, which we then borrow against so we can buy jet skis.)

"Okay," you say. "What's your point?"

China has us by the short ones. We depend on China economically to a degree that I doubt most people realize. If we got into a trade dispute with China, we would feel the pain and quickly. Wal-Mart would be empty without Chinese goods. I think consumers would soon freak out.

150 years ago, the west exploited China by getting them hooked on opium. Now they've got us hooked, except we're hooked on cheap patio furniture and golf shirts. And jet skis.


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