Hillary Rosner describes how the inflow of savings from China contributed to the US sub-prime crisis:
“The foreign reserve holdings of U.S. Dollars,” the researchers write, “which had been at less than 11% of U.S. GDP prior to 2000, grew rapidly after 2002; in fact they almost doubled over the 5-year period from 2002 to 2007.”
Read more at How urban Chinese workers helped cause the great recession – Quartz.
I can see some of the authors views however I think the article misses the point. Foreign reserve holding of $US of China is about a trillion dollars and this money has helped balance the US fiscal deficit much like how the money printing is doing the same right now. Japan has even higher $US reserve holdings and the article didn’t even mention them.
The Chinese workers are just trying to earn enough money to put food on the table and a roof over their head. The fact that they can save is a miracle and I’m sure the US bond market is the last thing on their mind. Sounds a bit like a scapegoat to me.
Colin, could the author be suffering a form of confirmation bias or at least some form of bias?
Japanese treasury purchases were more gradual. Chinese purchases were so heavy that in 2004 when the Fed under Greenspan lifted short-term rates, long-term rates failed to respond. These inflows of foreign capital sustained the US dollar at an artificially high level, giving both China and (earlier) Japan a trade advantage that damaged US manufacturing. Funding the deficit with printed money would have done less harm. That said, I believe that capital inflows were only one of many contributing factors and not the primary cause.