Tuesday, February 23, 2010

China is to Blame?

For what is China to blame? Most critics point to its exchange rate, linked at a fixed rate to the U.S. dollar. The critics want China to float its currency, or revalue it upwards to reduce its trade surpluses and global imbalances.

But currency is not the real problem. Rather, it is that China is enabling the U.S. government to run massive deficits and pile up an enormous public debt. If China were to announce that it would cease buying U.S. government securities and, further, begin to sell or fail to renew $10 billion of government securities every month until the U.S. gets its fiscal house in order, the federal government would be compelled to cease proposing spending programs and begin to curtail existing ones.

Is anybody listening in Beijing?

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