I know mainstream economists need a scapegoat but that aside is what they are proposing even possible?
Could you link any articles that disprove the idea that China’s savings caused the bubble.
Savings don’t creat bubbles. Monetary inflation creates bubbles.
When someone saves it means they forego consumption. If produce and sell eggs and get money in return, the eggs are presented to the market as a good someone can buy. If I don’t take my earned money and buy other goods then I decide not to take the equivalent amount of wealth from the market. The wealth remains unconsumed. There is no shortage in the supply of eggs. Prices will stay flat or fall. If I lend my money to someone else (even in another country) then they now hold the ticket to secure that market wealth that I chose to forego. I cannot simultaneously consume because I no longer hold the money. The debtor consumes that wealth that I was entitled to. Now it’s the debtor’s job to produce to supply that wealth back to the economy that he consumed with my money. When he produces wealth and earns back the money then he pays me back. Then I can go consume that wealth he produced. If the debtor defaults and does not produce then the wealth is lost from the economy. He can’t pay me back money and there is no replaced wealth that I can consume if the gov’t prints the money to repay me (ie he is bailed out by the Fed).
When money is printed it puts tickets (dollars) into the hands of those who have not produced anything for them to secure wealth from the economy simultaneously as the producers, who have earned the right to secure wealth, attemt to buy that same wealth. Monetary inflation therefore drives up the price (in terms of dollars). As prices rise it creates the illusion of prosperity and profitability. Speculation results and people blow up the bubble by buying in the bubble to sell it to someone else later at a higher price.
The mainstream economists, as usual, are confusing causality. The U.S lengthened its structure of production with a 4% savings rate through inflation. This requires either perpetual inflation, and/or forced savings; in our case, we had both. We continued to inflate all while the Chinese saved and financed this artificial capital accumulation, which is why we have a massive capital account surplus. Of course, this process will reverse itself if one of three things occurs: 1) Inflation stops or slows down, 2) Demand for current goods rises relative to future goods in the U.S, 3) Demand for current goods rises relative to future goods in China. There are massive international imbalances which will be corrected.
I don’t think cause is the correct word. Chinese savings were involved in the picture, because they helped finance our ramped up consumption by lending us money. If the worst predictions of inflation are true, this will prove to be a bad choice on their part. Peter Schiff argues that the U.S. cannot and will not make good on these debts, it will have to default on them. The sneaky method for doing so would be dilluting the value of the dollars that we use to pay back the debt. That seems to be what the Fed is working on as we speak.
While I see some possibility for savings in China to cause a bubble, I believe it takes carefull beaurocratic hand to create this kind of mess. [;)]
High savings in China were mostly induced by monetary policy in China partially as a response to monetary pumping in USA. Continous intervention on the both sides which prevented market to correct.
Inflation can’t create bubbles by creating an illusion of prosperity because everything goes up in price so your real income, and thus your observed level of prosperity, doesn’t change. I guess if everyone’s irrational maybe it might but not under the assumption of rationality.
cantillon effect
I was given an article by David Henderson and Jeffrey Hummel, published by the Cato Institute, during my stay at their seminar here in San Diego. They support Greenspan’s China theory. I tried to write a brief refutation of their paper, borrowing heavily from Shostak who wrote for Mises.org. The theory is that Chinese bond purchases increased the money supply more than the Federal Reserve did. China can’t increase the money supply by buying bonds, because the dollars they were buying them with came from exports.
If savings are big enough to knock down the interest rate that will kick up asset prices, although I wouldn’t call that a bubble since that’s a totally rational response to lower interest rates.
You get a bubble when people think asset prices will keep going up by leaps and bounds forever, although in theory this should raise interest rates enough to stop it but i guess not.
I think one of the major confusions is the interpretation of “borrowing money from China”. Businessmen are not borrowing money from Chinese banks. The government is borrowing money from the Chinese central bank. China holds a certain amount of reserves in foreign currency. They use their dollar reserves to buy U.S. Treasury bonds/debt. So, the government is effectively borrowing money from the Chinese, by using debt as collateral. The only way China can carry dollars is by exchanging currencies, and so they can’t increase the money supply in the United States. They can print out more Yuan, but the Federal Reserve will still have to print out more dollars if they want to meet an increase in demand for U.S. dollars with a greater supply. So, China has absolutely no effect on the supply of U.S. dollars.
Judicator, the reason why interest rates don’t rise in the event of an increase in demand for loans is due to the expansion of the money supply. The Federal Reserve creates credit in order to keep the supply inflated, forcing interest rates down.