Pet Peeve Number One

First real blog post in new blog time? I think so...

For the economics and/or politics portion of this blog, my first couple of posts are all going to be about economic or political beliefs that many people hold that are just plain wrong, and kind of piss me off.

Let me be clear - I entitle everyone to their own opinions, and have no problem with the majority of opinions a person might hold. However, the idea of an opinion is not valid in call cases, and certain opinions are not valid in all cases without the rejection of certain very basic assumptions. All of the problems I have with certain opinions come from people basing those opinions on things that are factually or theoretically incorrect.

The first of my major problems with opinions held by many people has to do with China. Actually, a lot of economic and political misconceptions about China are held by people in America, and I will be coming back to China and its interactions with the United States multiple times in this series of posts.

For the moment, however, I am going to speak specifically about our trade deficit with China.

First, I'm going to ask you to do some thinking. It should be pretty easy. I want you to think of all the things you buy that are made in China. It's a lot of stuff, right? It must amount to some very large percentage of what you buy every year, right?

This, here, is an opinion that many people in America hold to that is not true, and can be shown not to be true.

(For references to data, please look at this article from the FRBSF: The U.S. Content of 'Made In China'.)

In this article, you can see that, by overall value, the percentage of average personal expenditure put towards goods made in whole or in part in China is about 2%. That's pretty small, right?

There is a catch that makes this possibly unbelievably small number a little bigger - about 70% of personal expenditures in America go towards purchasing services, not goods. This includes healthcare and housing expenditures, the two largest categories of personal expenditures by value.

More importantly for us, the article makes the mostly valid assumption that 100% of services are 'produced' in America. This may not be wholly true, but it is so close to true that we can take it for granted.

Removing services from the picture, the value percentage of personal expenditure put towards goods produced in part or in whole in China by the average American becomes close to 10%, a more reasonable but still - probably - surprisingly low number.

The last reference to this article is to another surprising fact - with the exception of clothing and shoes, Americans buy more American goods than Chinese goods in every broad category across the board, often by a large margin. Disregarding services, Americans put about 24% of personal expenditures on goods towards American goods.

So now you're probably wondering why we have such a huge trade deficit with China. This is because the trade deficit in goods with China was about USD 295 billion (Values from here). Why is this? It's because the Chinese don't buy American goods. There are two reasons for this. The first touches on something I'm going to post about later - exchange rates. Specifically, China has its currency pegged to the value of the American dollar, so all American goods are more expensive in China then they would be without the pegging. Conversely, Chinese goods are artificially cheaper in America and this, naturally, contributes to the overall trade deficit.

The second major cause of the lack of American goods being bought in China is the average rate of savings in China. China saved more than half of its GDP in the 2000s (data and additional information from here). This results in two more things - the things apparently never end! But this is the last set of two things for today, I promise.

First, when you save more than half of your income, you don't spend it on goods. This makes it even more difficult for Americans to sell goods to the Chinese.

Secondly, all of that saved income needs to be invested. This is actually where the majority of the problems occur, as one of the major things that everyone knows about China and the United States is that China owns a very large portion of America's debt. The majority of this occurs because of investment, not because of our trade deficit in the goods area. While America continues to be a good investment, China will continue to invest heavily in America.

So, yeah. Please stop whining about how we buy too many things from China and they are slowly gaining control over America because of it. If you are one of these people, you are bad and you should feel bad.

As a final note, only two things will have a real impact on our situation with China. If they would allow our currency to depreciate, things would start equalizing over a long period of time. More importantly, if we started saving more and consuming less, the same sort of impact would occur, again over a long period of time.

So, if you are upset that China is buying up American bonds left and right and may some day own everything over here, you should stop being a typical American and save a bit more than a measly few percentage points of your income.

Until either our savings rate goes up or China's savings rate goes down significantly or America stops being a good investment for Chinese money, this problem will continue. Obviously we don't want the third option to occur, and the second isn't one we can rely on, so our only real way to impact the problem is by saving more and consuming less. (There are actually tons and tons of reasons to do this, but I'm about done here, so don't worry, we'll go into it later)

And now we're done. I'll be back on Monday to kick off reviewing books, probably by reviewing the entire Malazan Book of the Fallen at once. Why? Cause it's awesome, that's why.