Chinese savings

This article covers a pretty worthwhile topic, and it deserves better understanding.
The new trend in finger-pointing is to blame the Chinese for saving too much and consuming too little. They are investing so much money in the U.S. that they are driving interest rates lower, which fueled the recent speculative bubbles.

I accept the premise that foreign investment can be a catlyst to speculative bubbles and the subsequent busts. I believe it was Murray Rothbard that argued that the Panic of 1819 was in part caused by an inflow of silver from Mexico. It wasn't the silver per se that caused the panic, it was the fact that the banks were able to print 5x the currency for every ounce of silver they brought in. This increase in the money supply fueled speculation which was corrected in the panic. Again, we can't really blame the Mexican silver, we have to blame the banks that were multiplying the silver by 5 times through credit.

There are two things that contributed to the boom: free coinage, and fractional reserve banking. Free coinage means that the silver was turned into currency. In the case of foreign investment, there is no free coinage. In order to invest in the U.S., you have to trade something for dollars. You can't invest Yuan in the American stock market, you can only invest dollars.

In our case, the Chinese are trading products for dollars. They give WalMart lots of cheap crap, and WalMart gives China billions of dollars. Since the American savings rate has dropped, and consumption of cheap Chinese crap has increased, we could say that Americans are giving the Chinese their savings, and the Chinese are giving us their products. So, from the outset, our relationship with the Chinese should be putting upward pressure on interest rates since we are depleting our savings to consume their products.

From there, the conventional wisdom is that the Chinese are taking those dollars and investing the money in T-bills and AAA-rated bonds. I don't believe either of these activities is inflationary. T-bills are turned into government consumption. So, we have American savings being turned into Chinese products which is transferred to the government for consumption; this may be a drain on private enterprise in America, and it may support the expansion of the government, and the government may have to inflate one day to pay it off, but it's not inflationary today.

What about the money the Chinese put in AAA-rated bonds like those offered by Fannie Mae and Freddie Mac? The fact that the Chinese may have participated in the housing boom, just like everyone else, doesn't mean that they caused or enabled the boom. The cause of the boom would still be the money manipulation that made the run-up in housing prices possible. The fact that the Chinese put their money in a "safe" place that happened to be a GSE engaged in wholesale fraud is not their fault, it's the fault of the Federal Reserve which supported the fraud. The Chinese put their wealth in Fannie Mae, just like a lot of Americans did through their 401K's. The problem was that Fannie Mae was also getting credit created by the Fed to fuel their investments. To say that the Chinese, or 401K's, or greedy investors caused the boom is like saying that Bernie Madoff's investors caused his pyramid scam. Bernie Madoff couldn't have gotten away with it for so long without gullible investors, but ultimately he is the one we should be putting in jail because he was the one running it.

If you want to blame someone for the housing fiasco, blame the Fed. If you want to find fault with the Chinese, you can blame them for outcompeting America. The United States has become bloated with waste and false activities as far as the market is concerned. We over-regulate and over-tax our businesses. Our government is draining our economy with wasteful spending and incredible borrowing to sustain an American lifestyle that is unsupportable. We discourage savings, we jerry-rig our market to allow ourselves to consume more than we produce, and we prop up investment schemes that attract money from all over the world only to implode in on themselves. We support too many lawyers because we have more laws than we need, too many accountants because of more taxes and more regulations than we need, and more investment bankers trying to make money on the great pyramid scam that is the Federal Reserve. America is ripe for the picking. The Chinese easily absorb the production we outsource, and when they've saved enough money, they will be able to purchase the companies that outsourced to them in the first place. When production has left the States, and IT has left the States, and customer service has left the States, it won't be long before middle management, finance, marketing, and eventually ownership all leave the States as well.

Our one saving grace is that the Chinese seem to be putting all their money in T-Bills and AAA-rated bonds. These so-called conservative investments are the biggest false activities of them all. When the U.S. defaults on its debt, the wealth that the Chinese have been accumulating in the States all these years will evaporate and return to Americans. Sucks for them, but it's fitting that anyone that invests in The Leviathan should lose the shirt off their back.