Chinese Premier Wen Jiabao has blamed the US for the Great Economic Crisis which among other things put 25 million Chinese out of work last year.
Wen didn’t actually cite the US during his Davos rant against “excessive expansion of financial institutions in blind pursuit of profit,” the utter lack of government oversight of financial institutions, and an “unsustainable model of development characterized by low savings and high consumption.”
But even Mo, Larry and Curley couldn’t have missed the reference.
Wen and Co. have been appalled to discover their supposedly safe holdings in the US financial sector weren’t so safe after all.
This includes more than a few bucks in Morgan Stanley, the cratered Reserve Primary Fund, Aunt Fannie and Uncle Freddie.
But when his blistering rhetoric fades, Wen knows he’s got a foot in the same potato sack we do. The 2 economies have to hop together, like it or not.
That’s because China enables our profligate spending in order to prop up its export-based economy.
China accumulates wealth by exporting just about everything to the US. It uses the money it makes to buy T-bills, which finances our trade deficit. This keeps US interest rates low, which lets US consumers buy more goods from China while preventing the Yuan from appreciating too quickly.
China now holds $2 trillion in US foreign exchange reserves according to the Wall Street Journal. Around the time Lehman tanked, it surpassed Japan as the largest foreign holder of Treasury bills.
That’s fine when it comes to US government-backed securities, but China did start pulling out of Fannie and Freddie in Q3 and Q4 2008, a move that forced the Feds to step in back in November and buy $600 billion in debt from the troubled organizations.
Someday, US taxpayers are going to feel that and it’s going to hurt.