Monday, December 15, 2008

Why China is not Holding the American Economy for Ransom

Many people fear the immense amount of US debt held by foriegn countries. But Richard Spencer makes a case why this is not necessary:

Peston I think is falling into a common trap here of thinking that because China holds 1.9 trillion dollars of foreign exchange reserves, including more than 600 billion dollars in US treasury bonds, it holds all the cards, and America should do what China tells it to. But as I have argued before, this is a symbiotic relationship, in which both sides were caught in a trap - China couldn't stop overproducing, and through its currency interventions ensured that America could happily go on buying. That's what led to the US trade deficit. Both sides failed to bring this imbalance to an end on time, and both sides will now suffer. This goes for Britain too, of course.

Chinese officials themselves are now going around and saying of America that it should be nice to people who lend it money.

But in some ways this is an old saw: it has been common enough for people to talk about the inevitable transfer of power from America to China in the coming years as being the result of China becoming "America's bank".

Yet China is not America's bank. America is China's bank. This is pretty obvious when you think about it. You don't need to be an economist; you just need to think about your own bank accounts.

Why Robert Peston is Wrong.

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