The kindergartener-style responsibility shirking of current and former Federal Reserve officials doesn’t pass the sniff test — and it doesn’t stand up to empirical study, either.

What is more, there is also the issue of just how much of the “global savings glut” factor was actually Fed induced, in other words, just how much of the “they did it” excuse is just Federal Reserve buck-passing using disingenuous slight-of-hand.

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  1. Roger McKinney says:

    I was explaining to my class what Keynes wrote about the reparations from Germany after WWI and that the capital surplus coming from Germany required a trade deficit. Thus, low savings by Americans and high debt by the guv requires a trade deficit. A student asked why couldn’t the Chinese bring their yuan to the US and exchange them at a bank here without getting dollars via exports. So I walked them through the thought experiment:

    The Chinese fly over with truck loads of paper yuan to exchange for dollars. But they find that the savings of the US isn’t sufficient to exchange them at the going rate. There are too many yuan chasing too few dollars. As a result the value of the yuan falls dramatically so that the few dollars in savings will exchange for the many yuan. But then the Chinese find that they have no more dollars to loan the guv than what Americans had saved, which is too little and the reason the guv wanted to borrow from the Chinese in the first place.

    So to keep the yuan from falling in value, the Fed has to print dollars (or expand credit) to increase the dollars available to exchange for yuan without the yuan depreciating. Then the Chinese can exchange their yuan for sufficient dollars to meet the guv’s borrowing needs. So Fed monetary expansion is absolutely necessary for government borrowing from the Chinese.

    But who would exchange their dollars for yuan? Only people who want to buy something in China, such as WalMart. And Walmart only wants to buy Chinese goods if it intends to import them to the US and sell them here. So imports are necessary for the Chinese to find someone to exchange their yuan for dollars and necessary to finance the government’s borrowing.

  2. Paul says:

    Roger, I think you will just confuse your students. Why not just tell it like it is! Scared by the tech crash, The Fed effectively printed up a huge quantity of money (technically, provided all the reserves banks wanted to make loans at very low interest rate). This liquidity pumped up a housing bubble, fooling Americans into thinking they were richer than was actually the case. They filled up their overvalued homes via MEW with cheap trinkets from China, which used the dollars it received from Americans to purchase Treasuries. The global imbalances are really just recycled dollars.

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