So, everyone jokes that we’ll all be speaking Chinese in the next century because they’re “buying America piece by piece”.Â Well, how much does China really own of us?Â And how do they own us?
Let’s take a second to look at our torrid love affair with the Chinese.Â Why do we buy stuff from China?Â Because it’s cheap.Â It’s usually cheaper than a domestic equivalent.Â Why is it so much cheaper?Â Well, having a sixth of the world’s population available for inexpensive labor doesn’t hurt.Â But that’s not enough to create the cost imbalance.
Their stuff is cheap because they keep their currency artificially devalued.
It’s one of the many numbers games that got us into this seemingly interminable dross.Â You see, if we kept giving them money for their stuff, our currency would weaken and theirs would strengthen due to trade imbalance.Â And, since their stuff is cheap to begin with, China’s not going to turn around and buy the stuff we make.Â But they have to give the money back somehow.
So they buy our debt.
Treasuries and bonds and mortgage-backed securities and ANYTHING with a fixed rate of return.Â Compared against the world’s market, our debt was the safest and highest yielding around.Â Combine that with a country full of frivolous spenders (by the way, the newest iPhone just came out!Â Go buy it!Â Buy two!Â Now!Â AHHHH!Â SHOPPING!!!) and you’ve got a circular money system where we get cheap stuff AND a seemingly endless stream of financing for whatever our government wants.
Enter the subprime crisis.
Now, all of the loans that backed the debt that the Chinese held started to suddenly head south.Â Like, straight to hell, south.Â Also, China’s economy started to fire up as a new generation of young capitalÂists took the labor market by storm which pumped up their currency value.Â All of the sudden, our rosy little fake trade relationship came to the ugly realization that it couldn’t last in its current iteration.
We’re still borrowing, of course.Â But our buddies on the other side of the globe aren’t quite as interÂested in lending to us anymore.Â So, the cost of lending is going up.Â Hence, bond prices are going up.Â Hence, interest rates all over are going up.Â Hence, mortgage rates are going up.
And that’s no bueno for the housing market.
Our little romance isn’t going to suddenly end.Â They need us to buy their stuff.Â Badly.Â Do you know how many jobs they have to create over there?Â And if they fail, do you know how nasty the middle-class uprising would be?Â
But the fact remains that there’s trouble in paradise that a box of chocolates and a dozen roses probaÂbly won’t repair.