Three Steps Missing – Another Perspective

Once again reader BF provides another angle on my recent post on China’s relation to the US housing crash:

Actually, I do not think [Josh Marshall] was very far off the mark. I do not agree with everything he says, but his statement that the Chinese economy provided a lot of the fuel behind the housing bubble is a true statement. If over the past 10+ years China had remained stagnant, not grown economically since 1995, then the housing bubble, and all the other economic problems in the US would be very different than they are now. That in no way means, or implies, that they were “responsible” in some way for that debacle, but they were fully integrated into the housing bubble “machine”.

The most important way that China’s economic activity contributed to the housing bubble is that their economic activity, coupled with their currency policies, led to the US dollar being stronger than it should have and at the same time kept long term US interest rates artificially low. The massive purchases of US treasuries over the past ten years by China, as well as their decision to stockpile US dollars, due to their balance of trade with the US and a non-convertible Renminbi, kept the dollar up, to a certain extent, and the US rates lower than they “naturally” should have been. These low long term interest rates in the US were a huge factor in the housing bubble. People got lulled into a fantasy that that was where rates “should” be, that they could count on rates being that low forever, and that refinancing your home and pulling out cash was the normal way the world worked, because it did work that way for several years.

Globalization, and China’s key role in it, also tangentially contributed to the housing bubble. The economic rise of China over the last ten years was intimately tied into the gross consumerism that has proliferated in the US. It was the Chinese economic machine that made it possible for everyone to afford to buy consumer luxuries that just a decade before were unthinkable for average people. From junk at Wal-mart to $5000 wide screen home theater systems, the average person in the past ten years in America has gotten used to a certain level of consumption that was not only a great leap beyond what people enjoyed in the US just half a generation ago, but was also beyond their means. But, without the supply of inexpensive goods produced in China, often by subsidiaries of American companies, this would never have come about. This (further) rise of American consumerism and living beyond one’s means, which had a very intimate relationship with the housing bubble, was directly connected to the economic rise of China. Not only could people afford more, they wanted more. And looking over the Pacific at the source of all the goods the American consumer wanted, they saw people’s lives improving dramatically, going from abject poverty to comfortable middle class existence in seemingly the blink of an eye. I am sure this idea that, “If the Chinese can start to live so much better, then why can’t we? We don’t just want it, we deserve it!” must have occurred to quite a few people taking out second mortgages they could never afford to pay back, or buying a home that cost 10 times their annual household income.

The past 10 years has seen China and America become so economically integrated it is quite startling when you think about it. It seems to have occurred without anyone really considering its impact. 99% of Americans have zero real knowledge of modern China, its people, its leaders, its ideals or its goals. Nobody wanted to, they just wanted to keep getting inexpensive stuff from China coming, and more please! Globalization, the economic rise of China, America’s dependence on China’s manufacturing and support of American interest rates and currency all were intimately tied into the housing bubble in America.