China and the Deficit

We are responsible for the low standard of living in China, but not in the way you might expect.  We buy cheap goods from China while their workers barely see any of the resulting profits.  Our government and the government of China have a tacit understanding that facilitates this state of affairs.  Rather than distributing profits via increased wages, the Chinese government uses this money to finance US government debt, keeping the currency exchange rate low and keeping their goods monetarily cheap.

This would not be possible but for the US government requiring foreign financing to continue functioning on a day to day basis.  While this arrangement benefits US politicians by allowing them to fiscally have their cake and eat it too, it has also led to a steady flow of manufacturing jobs from America to China.  Without this government manipulation, and the compliance of American politicians, China would not have been able to build their industrial base as rapidly as they have; thus why the Chinese government continues to plow billions of dollars into depreciating American debt.

We really only have three possible exits from this cycle.  One is to hope that growing domestic discontent in China will lead to wage increases from their artificially depressed levels.  Two is to hope that American politicians (or American voters) will lose their appetite for irresponsible spending and refuse to play their part in perpetuating the cycle.  The last option is the endgame where the Chinese government realizes their goals; a strong industrial base at home and America a hollowed our shell of the competitor it previously was.  China inherits the best of both worlds with increased domestic demand and a strong trade balance.

In simple terms, the Chinese are saving and investing for a higher standard of living in the future, while America is living it up on the credit card but, unless we change, will ultimately face decline and poverty.