Economist Paul Kasriel and Asha Banglore of Northern Trust: Has America Achieved Economic Paradise On Earth?

Has America Achieved Economic Paradise On Earth?

Paul Kasriel and Asha Banglore

Northern Trust

The conventional wisdom is that the Chinese economy has a near infinite capacity to produce goods and services because of its abundant population. The conventional wisdom is that this abundant Chinese population wants to work – i.e., produce goods and services – but has little desire to consume the fruits of its labor. Therefore, China must export if its population is to be employed. The conventional wisdom is that because the Chinese people already own so many U.S. Treasury securities as a result of their central bank’s purchases, they would not dare do anything to bring about a fall in the value of those securities. Therefore, the Chinese central bank will buy any amount of U.S. government securities necessary to preserve the value of the outstandings and to keep the yuan from appreciating. If the conventional wisdom is correct, Americans have achieved an economic heaven on earth. We can now have as many guns and as much butter as we want, thanks to those automatons, the Chinese. Instead of fretting about U.S. government spending and borrowing, we should be encouraging even more of it, if the conventional wisdom is correct. We should be building up our defense systems to the max, issuing government debt to pay for it. After all, the Chinese will buy the debt to keep the yuan from appreciating against the greenback. Heck, we won’t even have to use any of our land, labor or capital to produce these defense systems. The Chinese will be happy to produce them for us and take IOUs in exchange. I know manufactured housing has bad reputation, but I bet those Chinese could turn out some modular models that look like McMansions. So, the U.S. government could buy these kits from China, again giving the Chinese IOUs, and distribute them to Americans. The only constraint would be the amount of vacant land in the U.S. and the labor to assemble the kits. But would not Americans be put out of work by all this? Of course. But so what? The government would write all of us slackers a check for whatever amount we want so that we could purchase all of our desired goods from China. Again, the Chinese people, who evidently only live to work, would gladly exchange the goods they produce for dollar-denominated IOUs. Man, I can hardly wait to take delivery of that 45-foot sailboat I have always wanted! So, if the conventional wisdom is correct, stop worrying about the fact that the U.S. is the world’s largest net debtor economy and start enjoying it. Don’t bother to reflect on the fact that the conventional wisdom is often incorrect.