America's Debt is not China's Fault
The American media is in combative mood: A year and a half after Lehman's collapse, the pundits are finally waking up to the fact that China bears a significant share of the blame for the current financial crisis. And so, the Krugmans of this world are calling for the US government to 'punish' China through a variety of protectionist measures.
I have been writing about China's role in creating the current crisis for a long time. And still, I think it is wrong to blame China for America's pains - namely, a collapsing credit bubble, rising unemployment, and a ballooning government debt.
Yes, the Chinese are manipulating their currency. By doing so, they make it easier for Americans to buy Chinese goods for less and make it harder for Chinese citizens to increase their purchasing power. They are also making it more difficult for Chinese companies to move up in the global supply chain and produce better, more innovative products for higher prices. China's currency manipulation, on its own, damages no one other than the Chinese people.
So how come America is in pain? Well, as noted above, China's currency manipulation encourages Americans to buy Chinese goods. The Chinese use a large share of the US Dollars they receive from such sales to buy US Treasury Bills. By doing so, they are practically sending Dollars back to America and making it easier for the US Government to run large deficits and for the US Federal Reserve to maintain low interest rates. These low interest rates, in turn, make it easier for American consumers to keep buying Chinese goods. They also make it easier for American consumers to borrow money for new apartments and speculative investments. The end result is a bubble in the stock and housing markets and a soaring national debt.
So, does this mean that China is to blame for the global financial crisis and for America's debt? Not exactly. China's actions facilitated the creation of a credit bubble in the US: China's purchase of US Treasury Bills makes it easier for the US Government to increase its deficits, and China's sales of artificially-low-priced goods tempers the rise in US consumer prices. This means that the US Government could spend billions on wars in Iraq and Afghanistan as well as on other government programs, without a significant rise in taxes or the price of goods ("inflation"). At the same time, China's government benefited from the American "boom" by avoiding rapid changes in the structure of its labor market and maintaining social stability.
In essence, China was (and still is) "exporting" unemployment in exchange for "importing" inflation. At the same time, the US is "exporting" inflation and importing "unemployment". The arrangement allowed the governments of China and the US to meet their short-term political goals at the expense of their citizens' futures. The Americans have no one to blame for their troubles other than their own politicians (and central bank), just like the Chinese have no one to blame for their relative poverty (and future stagnation) other than their own government.
The US and China should shift to long-term, sustainable political programs at home before they start pointing fingers at each other. It might cause some pain in the short term, but would benefit both countries, and the world at large.
(Of course, expecting politicians to make long-term decisions might be too much, but that's a different story).