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The Real Problem With Chinese Imports

Remember when you were a kid and you thought if you could dig a hole deep enough you'd get all the way to China? Well, that's exactly what we're doing now -- financially speaking. We're digging a huge hole of debt -- and it won't be surprising if the next generation finds itself at the mercy of the Chinese, who will be our creditors.

Headline: U.S. Records $199.8 Billion Second Quarter Current Account Deficit!

This week's report on the current account deficit might have seemed just another one of those huge MEGO numbers. (MEGO stands for My Eyes Glaze Over.) But the $190.8 billion deficit for just the second quarter of this year means that we are even more indebted to foreigners who accept our dollars -- and then make choices about what to do with all that money we are sending them in exchange for imported goods.

The biggest use of those dollars is to lend us money -- buying our Treasury securities and corporate bonds. Only a small portion -- about 12% -- goes into buying U.S. productive assets. The Chinese have a third use for the dollars we send them; they buy things like petroleum, or even Venezuelan oil wells.

Although the current account statistic includes services and investments, the imbalance is mostly about cheap imports. And mostly that means imports from China. Sure, we import a lot of other things -- notably oil, which is costing us ever more. But oil is a freely traded global commodity. Stuff made in China, by contrast, is priced artificially low because the Chinese currency -- the yuan -- is "tied" to the dollar.
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