[mathattack]

The author is very smart, and more trained in economics than I am, but I still disagree with some of what he says.

China is doing us two favors:

1) If they weren't buying our debt, someone else would. Without a large buyer like China, we would have to pay higher rates on our borrowing. This would trickle down to mortgages too, since China is a big investor in Fannie and Freddie debt, and mortgage backed securities.

2) Chinese goods are cheaper because of this policy. One could argue our domestic industry is less competitive, but on the surface, cheaper goods are better than more expensive goods. We benefit from the subsidy.

[jonknee]

> 1) If they weren't buying our debt, someone else would. Without a large buyer like China, we would have to pay higher rates on our borrowing. This would trickle down to mortgages too, since China is a big investor in Fannie and Freddie debt, and mortgage backed securities.

The point is without the US dollar being propped up against the Chinese Yuan we wouldn't need to borrow as much because exports would be much higher (leading to more jobs, higher tax revenue, etc).

> 2) Chinese goods are cheaper because of this policy. One could argue our domestic industry is less competitive, but on the surface, cheaper goods are better than more expensive goods. We benefit from the subsidy.

Conversely, American goods are more expensive because of this policy. It's difficult to say if we benefit from the Chinese government subsidizing Chinese manufacturing. The price gap is beginning to close because of rising Chinese wages and US manufacturing is becoming more competitive (our wages are still markedly higher, but the shipping costs are much much lower), so it should be interesting to watch the next few years. Especially with the very low cost natural gas supply that's coming online in North America.

[mathattack]

On point 1 - I agree with you in theory, in that anything we spend externally needs to be paid for by either selling something against it, or borrowing. This is Germany's issue too: they lend people money, so that others can buy their goods. My sense is that the Chinese aren't propping the currency up as much as they used to, but that's not based on hard data.

On 2 - In general countries (though not necessarily specific individuals and companies) do better with cheaper goods. This is why the gains of trade almost always exceed the costs. The question is does a forced cheapening by China create inefficiencies by moving us to tasks that we don't have competitive advantage? I don't know the answer.

Good discussion, and I appreciate your insights into economics.