Chinese Savings Helped Inflate American Bubble

American trade and budget deficits have grown worse and Treasury Secretary Henry Paulson Jr., with President Hu Jintao of China, has not been able to allay the problem. Pool photo by Goh Chai Hin

From The New York Times:

“Usually it’s the rich country lending to the poor. This time, it’s the poor country lending to the rich.”

— Niall Ferguson

WASHINGTON — In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.

The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.

This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, “we probably have little choice except to be patient.”

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