February 06, 2012
Almost no one who wrote about the economy for a major news outlet was able to recognize the $8 trillion housing bubble that was driving the economy before it burst. Because people who write about the economy are not held responsible for the quality of their work, none of the people who missed this huge bubble were held accountable for this failure. Remarkably, many of them even now do not understand the bubble.
Robert Samuelson, the economic columnist for the Washington Post, is among this group. Today he writes that:
“some economists argue that China’s trade surpluses — converted into dollars and invested in U.S. bonds — fueled America’s financial crisis by driving down interest rates. Low rates then encouraged riskier mortgage loans.”
Actually, the problem was not low interest rates. Low interest rates are generally good for growth. The problem was that China’s trade surplus with the United States, along with the surplus of other countries, created a large gap in domestic demand. This gap in demand could only be filled by either government budget deficits or negative savings in the private sector. (This is a logical necessity – a trade deficit means negative national saving, there is no way around this story.)
Since folks who write for or get cited in the Washington Post were all yelling about budget deficits, there was no alternative to the housing bubble-type situation where ephemeral bubble wealth led to a consumption boom, while inflated house prices caused construction to surge.
Samuelson also concludes with a dire warning of a dollar crisis in which the value of the dollar plunges against other currencies. It is difficult to envision what this would look like. Right now, other countries are deliberately propping up the value of the dollar in order to preserve their export markets in the United States.
In order for this sort of crisis to come about, they would have to be prepared to give up not only their export markets but to also allow U.S. goods to become hyper-competitive in their home market. If the dollar were to fall to say, 3 yuan to a dollar (from close to 6 yuan to a dollar now) or 3 dollars to a euro, then U.S. exports would hugely undercut many domestically produced items in Europe, China and elsewhere. It is difficult to believe that these countries would allow this sort of disruption to their economies.
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