When in Doubt, Blame the Asians

by Tim Swanson
by Tim Swanson

In a rush to explain the current economic conundrums facing the United States, an increasingly popular rationale is to shield policy makers and collectively blame Asia's huge rate of savings and large productive capacity.

For instance, former Treasury Secretary Henry Paulson thinks that global trade imbalances with Asia pushed interest rates down and drove "investors towards riskier assets."

Brad Setser of the Council on Foreign Relations believes that Americans borrowed too much and Asians saved and lent too much to Americans – that Asian money consequently flooded the US economy and drove down interest rates.

Michael Pettis, an American finance professor in China, suggests that China overproduces and underconsumes, an imbalance that ultimately recycled large amounts of savings back into the US housing and securities markets, creating an unsustainable bubble.

However, the main problem with the explanations provided by Paulson and the burgeoning establishment line is that none of the Asian countries sits on the Federal Reserve board, the prime instigator of this effervescent predicament. And as influential as the China or Japan lobbies are seen to be by many, neither country sets the federal-funds rate or conducts open-market operations.

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January 30, 2009

Tim Swanson [send him mail] is a graduate of Texas A&M University and is shivering his timbers in central China. Visit his blog.

Copyright © 2009 Ludwig von Mises Institute

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