In yesterday’s Wall Street Journal, Lawrence Lindsey wrote about the Chinese government’s policy of not allowing the value of the yuan to rise against that of the dollar:
America, however, benefits from this arrangement. The Chinese clearly
undervalue their exchange rate. This means American consumers are able
to buy goods at an artificially low price, making them winners. In
order to maintain this arrangement, the People’s Bank of China must buy
excess dollars, and has accumulated nearly $1 trillion of reserves.
Since it has no domestic use for them, it turns around and lends them
back to America in our Treasury, corporate and housing loan markets.
This means that both Treasury borrowing costs and mortgage interest
rates are lower than they otherwise would be. American homeowners and
taxpayers are winners as a result.
When [China’s President] Mr. Hu visits America, he will do his best to diffuse tensions
about the U.S. current account deficit, which he sees as the basis of
our concern about his currency policies. He will argue that our current
account deficit is largely determined by the fact that we consume too
much and save too little. Many American economists will echo this
sentiment. But it is disingenuous for Mr. Hu to make this argument
since it is his policies that subsidize both our consumption and our
borrowing by lowering the prices of these activities. And, in America,
unlike in China, it is market-determined relative prices that drive
Without here getting into the question of whether or not Uncle Sam would be wise to pressure China to let the value of the yuan rise, Lindsey’s remarks imply that, even as conventionally reckoned, Americans’ savings rate is not irresponsibly low. If foreign governments are forcing their citizens to subsidize Americans’ consumption, what’s irrational or irresponsible about Americans relying upon these subsidies and, thus, consuming more and saving less?
Put differently, if foreign-govenment monetary and trade policies truly are lowering the cost to Americans of consuming more today, it’s off-the-mark to lay the blame for Americans’ low saving rate on Americans’ irrationality, irresponsibility, myopia, stupidity, laziness, or crass materialism.