Why China Affects Your Mortgage Payment
So Americans will buy more U.S.-made goods?
Difficult to tell. We could get other countries selling cheaper goods to the U.S. instead: Vietnam, Thailand, Cambodia.
Has the 5.1 percent appreciation led to a cutback of Chinese imports to the U.S.?
That 5.1 percent is quite small. But 23 percent could make a difference. China is reluctant, though, to allow much more appreciation. They're getting job growth right now, there's low unemployment, and they don't want to do anything that might affect jobs and cause unrest.
The U.S. trade deficit with China is more than $200 billion a year. Who's responsible for that?
Well, China would say the reason you're importing so much is that you're too consumption oriented and you don't save enough. If you saved more, you wouldn't have such a big trade deficit. In China, the household savings rate is about 25 percent. Here, it's just about zero.
How does the trade deficit factor into this?
You have to talk about both deficits–the trade deficit and the annual budget deficit. One of the biggest concerns in the U.S. is the twin deficits. We're importing a lot of capital from abroad due to the trade deficit, which means a lot of principal and interest payments are going abroad. At the same time, more U.S. treasury securities must be issued to finance the budget deficit.
Why is that a problem?
Our trade deficit, also called the current account deficit, is about 7 percent of GDP. As you take on more and more external debt relative to GDP, at some point, the amount of payments you send abroad can exceed GDP. You can't make all those payments. That means you'll have to default. But before that happens, interest rates will go up, which would help reduce the deficit. But the adjustment could be abrupt and painful.
Do you foresee that happening?
No. But the trade deficit is hitting the territory where more and more people are concerned. The first thing that will happen is the dollar will depreciate–and that has been happening.
Is there a chance that the Chinese could overspend like the Japanese did and then have to retrench?
I don't see that happening. They've done a marvelous job fixing their troubled banks, their productivity is improving, their technology and management are getting better. Nobody would have thought five years ago that China would have accomplished as much as it has.
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