China and America's Debt

Thomas Friedman comments in his book (The World is Flat, p.143) that the savings from cheap Chinese imports has “helped the Federal Reserve to hold down interest rates longer” thus allowing Americans to buy homes or refinance, using their homes as ATM machines to buy more toys. As I write this CNN Money online has a headline about the possible collapse of Fannie Mae and Freddie Mac called, “The $5 Trillion Mess”(Benner, title) What the Federal Reserve has done is to artificially lower interest rates below free market rates by manipulation of the currency. This helped to create the housing (credit) bubble that has been in the news. .

Friedman also says that Morgan Stanley estimates Americans have saved $600 billion by buying cheap imports. The analytical group Bridgewater Associates now estimates bank losses worldwide from the credit crisis to total $1.6 trillion. The United States have been running a trade deficit with China that currently is over $1.4 trillion. “In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China” (Fallow).

Because of the cheap interest rates Total U.S. Consumer Debt has grown from $1.69 trillion in the first quarter of 2000 to the most current numbers of $2.56 trillion in May 2008. Mortgage debt outstanding at the beginning of 2000 stood at about $6.9 trillion and today it stands at $14.7 trillion. Federal Debt has climbed to $9.2 trillion from$6.8 trillion. (Federal Reserve) China currently holds over $1 trillion of this debt. There has been talk of bailing out Fannie Mae and Freddie Mac of late. China presently holds $376 billion dollars in these company’s bonds that are subject to US government bailout (Shedlock), so much for the American taxpayer saving from cheap Chinese imports.

Federal Reserve Bank (2008). Statistical Supplement to the Federal Reserve Bulletin.
http://www.federalreserve.gov/pubs/supplement/2008/05/200805StatSup.pdf
http://www.federalreserve.gov/pubs/supplement/2004/01/200401StatSup.pdf

Shedlock, Michael. (2008). U.S. Taxpayer Bailout of China over Fannie Mae, July 11, 2008.
http://www.globalstrategywatch.com/independent-insight/85886366ea7628c1b9fc317567dd54e5/

Fallows, James. (2008). The $1.4 Trillion Dollar Question, The Atlantic Monthly, Jan/Feb 2008.

Benner, Katie. (2008). The $5 trillion mess, Fortune, July 12, 2008. Retrieved July 13, 2008.
http://money.cnn.com/2008/07/11/news/economy/fannie_freddie.fortune/index.htm?postversion=2008071209

Mauldin, John. (July 11, 2008). $1.6 Trillion and Counting, Thoughts from the Frontline. Electronic Mailing List