A lot of people seem to think that because our economy was shattered on Wall Street, we’ll somehow return to a different sort of economy that will be built on building things ourselves by reviving our long-ailing manufacturing base. That’s not going to happen.
One reason it’s not going to happen is that the borrowing needs of the U.S. government have grown so huge that we badly need China to keep buying our debt. China’s willingness and ability to buy our debt is heavily dependent on the US trade deficit. The closer we come to “balancing” trade between the US and China, the less China will need to lend to the US.
To put it in the starkest terms: we’ve got to keep shipping our manufacturing base abroad so that China will need to keep buying our debt. If we buy less stuff made in China, they’ll buy less of our debt.
The good news (for us), is that China is stuck in the mirror-image trap. If they stop buying our debt, we won’t need to buy their stuff anymore.
In the long term, this is not a healthy co-dependency. For one thing, China’s borrowing is also dependent on a third factor: the corruption and risk of the Chinese economy, which drives up its savings rate. China’s companies simply don’t spend much domestically because they believe the short-term opportunities are limited, looting widespread and corruption endemic. So they engage in the Chinese version of “flight to safety” by buying US government debt.
It would be far better, of course, if the US government’s need to borrow from abroad was contained by reducing spending and increasing domestic wealth so we could once again “owe it to ourselves.” The problem is that there’s no politicians out there with a coherent plan to move away from our current trade deficit for borrowing deal.
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