I was musing about the rising power of China the other night, and Sandra wondered how the USA had managed to get a trillion dollars in debt to the Chinese. Here’s what I think happened. Please let me know what you think. It’s a tricky topic and I could be way off base.
I think the root cause is globalization. Under the pretext of establishing global free trade, American politicians removed tariffs on goods made in China. The idea was that with a billion-plus Chinese waiting to buy stuff, American exporters would gain entry to a rich, new market.
For a lot of reasons, some having to do with Chinese currency practices and trade restrictions, it didn’t quite work out that way.
What happened was that instead of exporting stuff to China, global corporations that operated in the U.S. moved their production facilities there. Chinese labor was so cheap that they could afford to ship their products from China to the U.S. and still come out ahead – way ahead.
The result was that a pair of shoes that would sell for – say – fifty bucks if it were made in the U.S. could probably sell for thirty when it was made in China. That was a boon for American consumers, and it would have been a great idea if the Chinese were buying something made in the U.S. that cost thirty bucks. Trouble is the Chinese were not. Instead, the Chinese government took the thirty dollars and bought U.S. Government bonds.
Of course, I am over simplifying. The Chinese do buy some American stuff. And I understand American based companies are selling hamburgers at outlets in China. But there’s a net imbalance. A BIG net imbalance. (Click on the illustration above to expand it.)
To make things worse, the U.S. Government has been throwing dollar bills around like confetti – a trillion here a trillion there … A trillion on that tragic adventure in Iraq, for example. And almost as much on the occupation of Afghanistan.
And instead of paying off its debts as they piled up, U.S. leaders have borrowed more and more. They even borrow money to pay the interest on existing loans. And once you start doing that, you’re spiraling into a bottomless pit.
China is not America’s only creditor, of course. Investors (and governments) all over the world hold U.S. bonds. As do thousands of Americans. But China is number one – by far.
Now, a lot of angry Americans are yelling their heads off about the national debt – 13.7 trillion dollars and rising by the second:
But, strangely, they don’t want to end those costly wars or bring the marines home from the beaches of Okinawa. They want to cut back or abolish Social Security, Medicare and other domestic programs.
That seems counter-productive to me. With the loss of so many manufacturing jobs, buying power has been severely diminished in America. The government’s domestic spending provides some support to the sagging economy. Cutting back on that kind of spending would lead to even less purchasing power in the U.S., triggering an economic death spiral.
Spending trillions abroad – on wars and military bases, for example – benefits foreign economies, not America’s. You would think cutting back on those military bases and those endless wars would make more sense than further impoverishing American consumers.
But, of course, the bottom-line answer lies in addressing the import-export imbalance. When America, which used to be called the bread basket of the world, imports more food than it exports, things have reached an unsustainable stage.
I think it’s time to take another look at America’s trade agreements.