Hey, thanks, China!

I feel like I should have been paying more attention. And maybe I should have taken some economics courses in college, because that might have helped, too. Until a couple of days ago, I certainly couldn't have explained a national savings rate to you. I also didn't know it was even possible for a country to dictate the value of their currency relative to other currencies. So why the sudden surge of interest? This big country called the People's Republic of China. It seems like I can't turn around without encountering another news story on the place. So I took that as a sign. A sign that it was time to get serious.

The amount of money that China has invested in the US economy is staggering. They possess around a trillion (!!!!!) dollars in foreign assets, and about seventy percent of this is in US dollar holdings. (Granted, these numbers are always estimates, because China considers its foreign asset holdings to be a "state secret," which, of course, only makes it more exciting. Right?) For the US, this means cheaper imported goods (hooray, iPods), lower taxes and interest rates, higher 401(k) values. For China, this means greater governmental control over domestic economic development and the prevention of massive inflation. All awesome, yes?

Now, this gets interesting when you start to consider the relative savings rates of China and the US, because I think one of the most important questions is: how can China afford this, and why do we need it? A country's savings rate measures the difference between what it produces and what it spends. The higher the savings rate, the less a country is spending relative to what it is producing. So obviously, a low rate would be indicative of the opposite: a country living better than it should. Which is exactly what the US is doing right now. China's savings rate is currently around fifty percent. This means they use only fifty percent of what they produce. Can you guess where the US's savings rate has been hovering lately? That's right. Pretty close to zero, and sometimes even lower, meaning we consume and spend more than we produce or re-invest. By now I think it starts to become pretty clear why this is DANGEROUS.

Here's part of how they do it. When a company in Country A makes a product that is eventually sold in Country B, a portion of Country B's currency will make it's way back to the place of production in Country A. Ordinarily, the company in Country A would take this currency to a bank and exchange it, in order to pay workers and taxes and what have you. Then the bank would be able to use this currency at its own discretion. Not so in China. In China, the bank must surrender it's dollars to the People's Bank of China, which is their equivalent of the US's Federal Reserve Bank. These dollars are then turned over to the State Administration for Foreign Exchange, whose job it is to decide how best to use these dollars. A majority of these dollars go to U. S. Treasury notes and federal-agency bonds, which pay low interest, but are very "safe." So what does this mean? It means our dollars come right back to us, and go right back into the US economy. Then it will (ideally for China) be spent on Chinese goods. However, what it really does is prop up our economy as we continue to live beyond our means: iPods, low interest rates, hurrah! It's not normal for a nation's economy to be supported in this way. In fact, the situation is considered unprecedented between independent countries during peace(?)time.

So at this point, pretty much only one question needs to be posed: what happens if (when?) they pull that money out? The short answer is that the US economy, as well as the dollar, would collapse. So if you were asking yourself why you should care while you were reading this, we've gotten to that part now. This is seen as a very plausible future reality for a few reasons. First off, the dollar has been decreasing in value, making it a less profitable investment for the Chinese. Second, the Chinese people are getting a little tired of watching their government send money away to pay for US expenditures while they still have an inferior infrastructure and inferior social services in many ways. Third, US political relations with China could pose a strain, depending on the level of aggression in our (or their) foreign policy. Now, obviously each of these reasons deserves an in depth explanation of its own, but I don't have time to learn about everything. Or at least, I haven't gotten there yet. Suffice to say, I'm nervous. And you know what? I really don't need more things making me nervous. So thanks a lot China, for stressing me out...

Oh. And for the iPod.