Wen blames America

Vladimir Putin and Wen Jiobao have blamed the worldwide economic recession on the United States. The financial crisis, said Mr. Wen, was “attributable to inappropriate macroeconomic policies of some economies and their unsustainable model of development characterized by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit”.

At first glance, his statement seems to be relatively accurate, referencing the low savings rate and consumption powered by excessive borrowing that were characteristic of the United States from 2003-2006. However, the root causes of our economic are more complex than that, and, ironically, may have came from Mr. Wen’s home country and not irrational spenders in North America.

China has maintained a massive trade surplus, and America a massive trade deficit. Much of China’s income or surplus was invested in foreign currency reserves like the dollar, and specifically, Treasury bills. This had the dual purpose of paying interest on their cash haul, and, more importantly, weaking the yuan with respect to the dollar (by purchasing Treasury bills, demand is created for the Dollar, strengthening it, and selling yuan for dollars puts downward pressure on the yuan’s value). This cycle of using China’s trade surplus to buy Treasury bills ensured that the flow of Chinese goods came cheaply to American consumers. Also, it ensured that interest rates in the United States were artificially low, led down by low yields on Treasury paper.

The excess boom of debt fueled by low interest rates in the United States was partly to blame for irresponsible borrowing, which blew up in our face as banks failed when borrowers couldn’t pay back their loans.

China is just as much to blame for the financial crisis. Their economic policy of maintaining a weakened yuan by continually buying Treasury securities inflated the US economy with easy money.

I’m not trying to deflect blame from the American consumer to the Chinese government. What I’m trying to say is that in our dynamic and complex economy, we cannot rely on the primitive and simple cause-and-effect relationships that Wen and Putin have pointed to. The truth is that many factors are responsible for our current economic malaise, and even those factors were caused by phenomena years ago, and also share the blame.

Wen, Putin Slam U.S. Economic System – WSJ