This I Believe: Growth and Prosperity

The This I Believe website is a national media project engaging millions of Americans in writing, sharing, and discussing the core values, philosophies, and beliefs that guide their daily lives. Founders Jay Allison and Dan Gediman say “their goal is not to persuade Americans to agree on the same beliefs. Rather, they hope to encourage people to begin the much more difficult task of developing respect for beliefs different from their own.” This project has inspired me to write about my own beliefs, especially within my field of study, and how they were shaped.

I believe in growth and prosperity. As a child, I would frequently visit my Grandpa Max in the small town of Redding, California (see map). Looking back, one of the favorite memories I have of visiting my grandpa was the endless number of stories he yearned to share. Using his experiences of growing up during the Great Depression in the 1930s, a time when jobs, and the money that went with them, were extremely scarce, Grandpa Max used to tell me about how he and his family could barely make ends meet, and the amount of effort it took simply to put food on the table. When the Great Depression ended, my grandfather entered World War II and was in active duty until its end in 1945. After World War II, the United States saw a sharp rise in the economic wealth that lasted throughout the fifties and well into the sixties. I heard many tales from this time of his life too, but these sagas were very different than his hardship stories: these were excitedly told with a child-like giddiness.

For my grandfather, the 1950s and 1960s served as a respite from his previous worries, a time that definitely lived up to clichés like “affluent society” and “American as apple pie.” As Henry David Thoreau once said, “wealth is the ability to fully experience life.” At the end of World War II, that is exactly what my grandfather, and maybe most of his generation, did. He moved from Oregon to California in the early fifties with my grandmother and started his family. Grandpa Max, for the first time in his life, was able to purchase a home, and easily find a job that could support his entire family. I can vividly remember him rambling for hours about the new gadgets that came out during this high time and how, on his income, he was able to purchase them when they were first released into the market. He babbled aimlessly about his new color TV and how CBS’s “Gunsmoke” was perhaps the best TV show to hit primetime; moreover, he would frequently bring out the first rotary phone (pictured) that he owned from the dusty boxes in the garage and allow me to use it as my “play phone” when I visited. As I played telephone, he marveled at how the invention of instant coffee was his “savior” in the mornings when he would awaken for work at 5:00 AM. With his instant coffee, Grandpa Max would joke that he would get up every morning and look through the Forbes list of the richest people in America, and if he was not there, he would go to work!

Economic growth and prosperity are at the very crux of a country’s well-being, and more importantly, they are the vehicle for the satisfaction of its citizens. Growth means prosperity, and, conversely, in the minds of most, no growth means stagnation, recession, and a decline in the standard of living. In that way, economics is not the accumulation of abstract statistics, but rather the reflection of the hopes and dreams of sequential generations. I have taken it upon myself to write in my blog about the economic situations that affect growth and prosperity, for example, a trade deficit. One of my favorite quotations is from American physicist Richard Feynman, “There are 10^11 stars in the galaxy. That used to be a huge number. But it is only a hundred billion. It is less than the national trade deficit! We use to call them astronomical numbers. Now we should call them economical numbers.” No matter how unbelievable these numbers appear, the statement holds a very strong truth. The higher the trade deficit, the less ideal economic growth becomes. I touched on this current issue in my post entitled “Trade Deficit: Record High”.

In essence, I owe my keen interest in economics to my grandfather (pictured) and his endless engrossing stories of the “happy days,” fueled by the growing economy and prosperity he experienced. It is from his stories that my strong belief in growth and prosperity sprang. I was able to see how a healthy economy sets the stage for a life that is happy and rewarding. And that definitely captures my attention.

China Plummets: Theory Almost Proven

In my January 29th post titled “China’s Economy: A Ticking Time Bomb,” I had come to believe that, with China’s incredible growth, its economy will eventually spiral out of control. Well, in the wee hours of Tuesday, February 27, 2007, the Chinese stock market plummeted by nearly 9% (see photo of investor in front of the dismal electronic board in a Shanghai stock trading hall), shaking up other stock markets from New York to London, and reaching literally around the world by the end of the next day. ABC News reported that “the Shanghai Composite Index (the major index in China) tumbled 8.8% to close at 2.771.79, its largest decline since it fell 8.9% on February 18, 1997, at the time of the death of Communist Party elder Deng Xiaoping.” Considering the Shanghai market was up 130% last year, what caused this substantial drop? Was it just a temporary “adjustment,” or was it a sign of a much larger economic failure looming ahead?

Many factors provoked the fall of the Chinese market, but two stand out as major contributors. First, investors feared that the Chinese government would soon crack down on speculation that has driven stock prices to record highs. Government officials hinted that a special tax on capital gains may be introduced, thus wreaking panic onto investors as they quickly unloaded Chinese shares as a way to lock in profits before tax changes. Secondly, investors were being proactive; that is, they thought it was simply time for some profit-taking. As Peng Yunliang, senior analyst at the Shanghai Stock Exchange, put it, “People viewed 3,000 as a psychological benchmark. It is understandable they might want to pull back after the market hit that peak after such a long run.” China's Shanghai Index had gained 1.4% on Monday, the day before the plunge, and opened at 3,040.60 (40.60 above the so-called psychological peak). After the fall, it closed at 2.771.79.

Michael Roberts, author of the enticing article “World Stock Markets in Turmoil,” wrote that the “chaos theory applies in the anarchy of world capitalism: when the Beijing butterfly flaps its wings, the snow falls on New York.” The Chinese stock market plunge did not just stay within China; as indicated above, it spread quickly worldwide, causing the stock markets around the world to fall by 3-4% within a matter of hours after the drop in the Shanghai Composite Index. For instance, in Hong Kong, the benchmark Hang Seng Index dropped 1.8% (see photo), while Singapore’s Straits Times Index sank 2%. This "butterfly effect" then reached around the continent to European countries, where major indices dropped similarly: the United Kingdom’s FTSE-100 plunged 2.31%; France’s CAC 40 dropped 3.02%; and Germany’s DAX slid by 2.96%. But, it got worse: the U.S. Dow Jones Industrial Average plummeted with a loss of 200 points in one minute around 3:00 p.m. (see graph); the Dow continued to fall, reaching a loss of 416 points, or 3.3%, serving as the worst one-day drop in the U.S. since September 2001. And, to complete the world picture, Latin American countries were also affected by China’s recent drop. In Brazil, Sao Paulo’s Bovespa Index was off 4.1%, Mexico City’s IPC Index shed 3.4%, the IPSA Index in Santiago was down 3.8%, while in Buenos Aires, the Merval Index dropped 5%.

What is it that makes China’s “butterfly effect” so influential? China is not the only fast growing economy, but it seems to be the one with the most impact: “its contribution to global GDP growth since 2000 has been almost twice as large as that of the next three biggest emerging economies, India, Brazil and Russia, combined.” Jim Jubak, senior markets editor for MSN Money, elaborates on China’s global economic influence in terms everyone can understand: “If every person in China consumed one more tablespoon of soybean oil annually, world trade in soybean oil would double.” China grew on average over 9% in the last 25 years, but trade grew even more, with an unprecedented 12% over the same period. If recent trends continue, China will emerge as the largest economy somewhere between 2030 and 2040, and it will be the largest trading nation before 2020. China serves as a locomotive for the world economy. When China grows, other countries benefit from lower priced goods. Just look at how fast flat-panel TVs are going down in price. However, if growth slows or stops, the people of other countries will feel the pain through higher prices goods, leaving less money for other spending.

Now, back to the original question: was the Chinese stock market drop simply a normal “adjustment” (albeit a strong one), or was it a sign of something more sinister? It is true that as the government denied rumors of such “special tax” measures the day after the plummet, Chinese shares did rebound by nearly 4%. But Barclays Stockbrokers analyst Henk Potts of London confirmed that “there continues to be a lot of nervousness around the stock market.” As a result, world-wide stocks are still closing at low rates as this wave of anxiety (see inset) spreads to investors. In my opinion, Potts is on the right track and there is still much more to come; February 27th was just a small wave hitting the shores of every continent in advance of a huge global tsunami. With the Asian markets still down and the plunging U.S. economy, an emergence of a world crisis will happen. Many people believe that markets will recover. But, the current stock market fall is just an indicator of the future deterioration that will unfold over the next couple of years.

Trade Deficit: Record High

America has a big problem: it imports far more than it exports. As a result, the United States is suffering from a massive and growing trade deficit (see graph). Last year, 2006, marked the fifth consecutive year that the trade deficit hit a new high, amounting to an incredible $764 billion. Even scarier is that, according to a statement by AFL-CIO (American Federation of Labor-Congress of Industrial Unions) Secretary-Treasurer Richard Trumka on the Release of the Annual Trade Deficit figures, “the imbalance between our imports and our exports is so enormous now that our exports would need to grow at least 53% faster than our imports just to keep the trade deficit from growing.” A trade deficit in general is not a bad thing. Most countries run a deficit; however a gap as large as the United States calls for special attention. Over the long run, the United States will have to repay its debts (with interest) and is likely to suffer a significant net wealth drain.

Because the trade deficit hit a historical high, the media has been investigating this issue quite heavily. And, it is an easily misunderstood issue. (I know this because there are so many opposing points-of-view). But, instead of reading more about how economists weigh in about this issue, I wanted to find out what average American citizens had to say; thus, I turned to the blogosphere. One blog that captured my attention reminded us that resorting to protectionism to fix the issue was not the solution; the other mulled over how the trade deficit was directly causing incredible job losses in the United States. My comments on both blogs can be found below.

Comment on Blog 1 on protectionism:

Mark, you make a very interesting point in your blog: restrictions on trade are restrictions on people. It is obviously true that we all contribute to the growing trade deficit in the United States by being so willing to buy goods made in other countries. I am personally a big supporter of textile imports: I buy clothes brands from other countries, and I buy from U.S. companies that outsource their labor in other geographies, such as Nike (pictured), to name one well-publicized example.

It is also clear that our imports and exports need to be more balanced than they are today in order to avoid an economic disaster in the future. The gap just cannot grow forever. But heavy-handed trade restrictions are not logical either. Is there a way to manage the trade gap and still avoid the consequences of protectionism and unrestricted free trade?

The devil is in the details, but only after the trade gap is significantly reduced. In the short-term, the United States needs to impose strong restrictions on trade because it needs to get itself out of the huge deficit hole that it has created and stop the momentum. That calls for protectionist policies. No one will be happy: trade partners will cry foul, and Americans will be hit with higher prices on a wide range of personal items, considerably reducing discretionary spending and potentially slowing our economy as a whole. But trade restrictions are required to right the ship and quickly close some of the trade gap. Ultimately, in the long-run, the United States’ deficit demands more attention and a delicate hand, similar to the way the Fed handles interest rates to mange inflation: a little adjustment here, a little there, and nothing gets too far out of whack.

Comment on Blog 2 on job loss:

Yes, the “trade deficit numbers may not be sexy.” However, your notion that the trade deficit directly causes job loss sends the wrong message, because it is easy for critics to cite evidence that we, as a country, easily live with a high deficit and low unemployment. Paul J. Samuelson of the Washington Post states that “from 1980 to 2006, the trade deficit jumped from $19 billion to an estimated $786 billion, or from less than 1 percent of gross domestic product to about 6 percent. Still, employment in the same period rose from 99 million to 145 million.” In a similar fashion, the monthly report from the U.S. Labor Department showed that the January unemployment rate dropped to a 4½-year low of 4.7% from 4.9%. The last time the rate was lower was in July 2001 when it was at 4.6 (see graph). During a time when the United States is suffering from the highest trade deficit in history, it is also operating with a historically low unemployment rate.

That is not to say that the trade deficit is a good thing for the economy, but there are many other reasons that can explain job loss: new domestic competition, new technologies, changing consumer tastes, and so forth. It is true that certain industries are affecting job loss in the United States due to the trade deficit and lower-wage competition abroad, for instance, every three months, 7 million to 8 million U.S. jobs disappear; but, roughly an equal or greater number of jobs are created in more technologically advanced industries. Trade is a relatively minor factor in job loss; it is just an easy scapegoat for critics.

U.S. Immigration: Do Not Lose Sight of the Benefits

A highly-controversial issue that has surfaced in America, especially California and other Mexico-bordering states, is the one of immigration. There are plenty of critics of current immigration policies as they relate to national security, and rightly so. But when critics direct their attention at citizens of Mexico, the discussion takes on a nasty, personal tone. There is general worry that terrorists can easily cross into the U.S. through Mexico. That critique is justifiable. However, Americans are increasingly seeing Mexicans as freeloaders cashing in on the generosity of America, and then sending their new wealth back to their native country. Many Americans claim that Mexican immigrants who live here drag down their quality of life, and point to overcrowded neighborhoods and communities where the only language spoken is Spanish (apparently proof enough to natives that Mexicans have no intention of integrating into the American way of life).

The government is responding to the national security issue by going after undocumented workers. Fear has recently riveted immigrant families across the country as federal agents (pictured) forayed through neighborhoods, work sites, and jails in a nationwide crackdown on illegal immigration, mostly from the south. Nationwide, federal officials have launched a full-blown offensive to find and deport illegal immigrants. “It is part of a two-pronged approach,” stated Virginia Kice (pictured), spokeswoman for U.S. Immigration and Customs Enforcement: “secure the nation’s borders while stepping up enforcement within.” By focusing on national security, the federal government has found a convenient way to also address emotionally-charged concerns by U.S. voters that Mexican immigrants are not paying their fair share. Two separate issues, that of national security and that of keeping immigrants from unfairly sapping our economy, have certainly been fused together.

Kice recently stated that immigration “makes a mockery of the system and sends the wrong message to those who follow orders.” In a recent Time Magazine poll, three-fourths of American citizens stated that the United States is not doing enough along its borders to keep illegal immigrants out (see picture). Americans believe that immigration is harmful to the U.S. economy, and firmly believe that all immigration should be restricted and call for tighter border control to keep all immigrants from entering. But, is it true? Is immigration really harmful to our economy? Or are there benefits to economic growth that we should be very concerned about tampering with?

The side effects of immigration can be both positive and negative. But in my opinion, the negative effects of immigration can easily be outweighed by the positives. In Douglas Bower’s article, “American Economy Benefits from Mexican Immigrants,” he proves that immigrants venture to the “land of opportunity” with an insatiable thirst for work and a desire for a better life, and to not just “freeload” off the economy. When immigrants come to the United States, they immediately increase the demand for U.S. goods and services. They shop for food in local grocery stores, and they move into apartments or homes in the area. Many times, immigrants are the ones that occupy apartments that are shabby and dilapidated—ones that other groups (i.e. natives) are not interested in. The hundreds of thousands of units rented to immigrant families put upward pressure on all real estate prices. But immigrants also bring down prices in other areas, such as food. Restaurant prices are kept lower by illegal labor in the kitchen; fruit and vegetable prices are kept lower by illegal field hands willing to work for less than their American counterparts. Immigrants put money into the economy and also serve as a hedge against inflation.

Opponents may argue that immigrants do not contribute as much to the economy as proponents would like us to believe, due to the fact that they send at least half their earnings back to their country of origin. However, thanks to research by the Economic Roundtable, a research think-tank in Los Angeles, CA, that claim does not seem to carry much weight: 400,000 illegal workers in L.A. County spend, on average, $5.7 billion annually on food, rent, transportation and other necessities.

There is another claim that immigrants are creating rising unemployment issues by taking jobs from American citizens. A U.S. Department of Labor study noted that the perception that immigrants take jobs away from American workers is “the most persistent fallacy about immigration in popular thought” because it is based on the mistaken assumption that there are only a fixed number of jobs in the economy. Unemployment in California, which accounts for 24% of the country’s (illegal) immigrants, has tracked the low national rate. And as any economist knows, a lower unemployment rate is a key to a happy and healthy economy.

In response to the “freeloading” issue, Stephen Moore conducted a study, titled “A Fiscal Portrait of the Newest Americans”, where he demonstrates how immigrants benefit America: immigrants contribute $10 billion to the U.S. economy each year; immigrant households pay more than $90 billion in annual direct taxes to the U.S. federal, state and local governments, while only receiving $5 billion in welfare. Without their contributions, the economy would suffer enormous loss; immigrants and their families pay $80,000 more in taxes than they use in any services, over the course of their lifetime. This is more than the average native-born American.

As I see it, it is a waste of time to get carried away with the immigration issue. Yes, national security is extremely important. But many of the people who will get caught up in a policy designed to secure our borders are also collectively bringing real long-term economic benefits to the United States as a whole. American fears of the harmful economic consequences of immigration are not justified and it is unfortunate that no one is speaking more convincingly for the other side.

Income Inequality: The Rich and the Rest

President Bush has not commented on income inequality much during his two terms. It was never an issue during the candidate debates. But it is a very real and important issue, and finally he brought up the subject in his speech on January 31, 2007 on Wall Street: “The fact is that income inequality is real-it's been rising for more than 25 years. The reason is clear: We have an economy that increasingly rewards education and skills because of that education.” For a long time, income inequality—the gap between the rich and everyone else-- has been growing steadily in the United States. Bush’s speech as drawn some much-needed attention to this topic, but much more needs to be done. Democrats have repined over this issue for years, but the fact that the leader of the Republican Party now acknowledges it has finally stimulated the media into action. And this is not just a U.S. issue. The Wall Street Journal has been writing about the paralleling issue in Asia, specifically China: “China's economic miracle has lifted hundreds of millions of people out of poverty, but the country is showing signs that its poorest citizens are falling further behind.”
Due to the elevated media attention to these issues, I decided to probe the blogosphere and see what others have to say about this topic. I found two very interesting blogs, one dealing with the United States’ current situation and the other with Asia’s. Both comments can be found below.

Comment on Blog 1 about the United States' current situation:

The idea of implementing a progressive income tax (especially when it essentially already exists in the United States) is simply not best means to solve the issue of income inequality. As fellow blogger Kurt9 had mentioned, income inequality itself is not a problem. The main issue lies in unequal opportunities. America has an obligation to ensure that there is not a lack of equal opportunity for all Americans to achieve wealth. And, in that regard, it is higher education that is the main enabler of economic success in this country. However, over the past twenty-five years, the wages of the skilled and educated workers have grown faster than the wages of the less educated. For instance, in 2003, according to the U.S. Census Bureau, four-year college graduates in America earned an average paycheck nearly double that of high school graduates; moreover, holders of doctoral and professional degrees earned three to four times that of a high school graduate (see chart).

Federal Reserve Chairman Ben Bernanke (pictured) said “disparities in education and training are likely the single greatest source of the long-term increase in inequality.” Thus, “policies that boost our national investment in education and training can help reduce inequality while expanding economic opportunity,” he said. The key to income “fairness” is to make sure that the tools necessary for wealth (i.e., higher education) are available to all equally. Don’t look to tax the rich more for what they have earned. Instead, the poor should raise hell about a government-run school system that does an appalling job in educating children, and the high cost of university-level education. Bush has attempted to solve this issue by putting forth two distinctive programs, No Child Left Behind and American Competitiveness Initiative, which serve as vital steps into helping create equal opportunity among Americans. But it is not enough. Dramatic changes in education are needed, and fast. Or the income gap will just widen.

Comment on Blog 2 about Asia's current situation:

Asia’s economy as a whole (including that of China and India) has been growing very fast. With that comes the issue you discuss in your blog about the income inequality. You say that a widening income gap (see chart) is not a large issue to be concerned with. However, the true strength of a country comes from a strong middle class that can carry the load of commercialism. Rising inequality threatens economic growth, especially since it has meant declining or stagnant income growth for lower- and middle-income families. If the vast middle-class families do not see relative income gains (it is not enough “just to be doing better”), they cannot afford to purchase the goods and services that keep the economy moving. Their discretionary income will not be able to keep up with the rising inflation. Asian countries will soon become nations of haves and have-nots. It is good that everyone is “doing better,” and that is something to celebrate. But for long-term economic growth and heath, the income gap needs to be kept in check.

Increased Minimum Wage: Historically Right

Sixty-nine years ago, Franklin D. Roosevelt signed the Fair Labor Standards Act of 1938, which established the nation’s first minimum wage. Urging the passage of this legislation, Roosevelt declared “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By living wages I mean more than a bare subsistence level—I mean the wages of a decent living.” Now, nearly seventy years later, those words seem as relevant as ever. America is long overdue for an increase that puts workers at a living wage level. The minimum wage in the United States has been frozen at $5.15 an hour since 1997 and millions of American workers are falling further and further behind. At this rate, workers would have to work 11.2 hours just to fill up their gas tank. But the story gets much worse than that.

The current federal minimum wage of $5.15 is not high enough for someone even to make a decent living in the United States. See the inserted chart. It just proves that current minimum wage is well below the red poverty line, or better referred to as Roosevelt’s bare subsistence level. For someone working full time (40 hours a week, 52 weeks a year), their yearly earnings would be approximately $10,712 based on the minimum wage level, nearly 40% below the current poverty level of $16,600 for a family of three (as of 2006). So why has the federal government not raised the minimum wage level? After all, more than two dozen states in America already have minimum wages set above the federal level.

The federal government finally took steps to close this gap on Thursday February 1, 2007, when the Senate voted overwhelmingly (94-3) to boost the federal minimum wage by $2.10 to $7.25 an hour over the course of two years. The legislation would raise the minimum wage in three steps. It would grow to $5.85 an hour upon taking effect 60 days after the President signs it into law, then to $6.55 an hour a year later, and to $7.25 an hour a year after that. Senator Edward Kennedy (D-Mass.) stated that “Passing this wage hike represents a small but necessary step to help lift America’s working poor out of the ditches of poverty and onto the road toward economic prosperity.” Unfortunately, it should still be noted that even at its highest level of $7.25 per hour, the annual equivalent is $15,080–still below today’s poverty level but certainly an improvement from the status quo. Roosevelt would not be entirely happy, but might be feeling a little better.

Nothing stays the same, especially in the economy. The federal minimum wage must increase on a regular basis; if not, the working poor will only get poorer as the value of the minimum wage sinks below inflation and falls further behind the cost of living in the United States. Since the last wage rise in 1997, the purchasing power of workers earning minimum wage has been severely eroded and has decreased by more than 20%. So, why fight the extra boost? Not surprisingly, as with everything in America, there is an opposing point of view. Many critics (and there really are many) continue to raise the same tired arguments every time the thought of increasing the minimum wage level is considered: an increase will harm the economy, destroy job growth, and shut down small businesses. Close examination, however, shows that these criticisms are not really true. To see why, let us take a closer look at each one of these myths:

Negative Economic Effect: The minimum wage increase will actually boost earnings for thirteen million American workers, which constitutes for 9.8% of the workforce. This, in turn, raises the disposable income of the workers and decreases their dependence on state and federal subsidies. Living wage workers are guaranteed to spend the money they earn in their local economy. Dan Gardner, Oregon labor commissioner, comments that minimum wage work force are “not saving for a Hawaiian vacation.” Since these blue collar workers are supporting their families and cannot afford to save, the extra money earned will get pumped right back into the economy. Thus, a wage hike directly expands the economy and there is no negative economic effect.

Destroy Jobs: Another myth about the effects of an increase in the federal minimum wage is that it will destroy job growth and shut down small businesses. But the trends of the economy after the 1990-91 and 1996-97 wage jumps show no measurable negative impact on employment. In fact, between 1997 and 2003, “small business employment increased by 9.4% in higher minimum wage states, compared to 6.6% in states at a federal level.” According to the Economic Opportunity Institute, no studies have found statistically significant job loss that can be associated with these wage increases. In fact, it is just as accurate to assert job gains linked to the minimum wage increase.

Shut Down Small Businesses: This is the most popular argument against raising the minimum wage, because it seems so logical at face value: if the expenses of small businesses, many that are already marginally profitable, are increased, the business will be put over the edge. Small businesses themselves are the loudest voices in this regard. But again, take a look at history. After the wage increase of 1997, the Center for American Progress asserted that “the number of small businesses increased by 5.5% in higher minimum wage states, compared to 4.2% in states at the federal minimum wage level.” Why does this happen? According to Texan Congressman Al Green, the theory is that businesses absorb the costs incurred by the wage hike through “higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.” But whatever the rationale, the New York-based Fiscal Policy Institute (FPI) contends that the the number of small businesses actually grew in states where the minimum wage was higher.

The myths are not justified. The minimum wage does not have a negative economic effect, destroy jobs, or shut down small businesses. Roosevelt was right to fight back the critics in his day, and it is right to continue fighting today. Senator Edward Kennedy (pictured) firmly deals with opponents of this issue and asserts that “in the first four years after the last minimum wage increase in 1997, the economy had its strongest growth in thirty years. Nearly 11 million new jobs were added, an average of more than 200,000 new jobs a month.” So, why not just better the lives of millions of Americans?

America: In Danger to China

During our “blog shows” in class the other day, a question was brought up about the United States’ debt to China. In a follow-up, I’d like to touch on the subject.

Some people believe that it is not a good idea that most of U.S. government operations are financed by a communist country. At the end of 2005, China, with $820 billion in such assets, was the second-largest holder of U.S. debt after Japan, which held about $10 billion more. Owning such a significant amount of U.S. assets gives foreigners considerable economic influence. If China even reduces its Treasury purchases, the U.S. would run into substantial difficulties. According to the Nikkei Weekly, a Japan-based business magazine, “Beijing is holding a dagger to Washington’s throat.”

Moreover, if foreigners, specifically China and Japan, decide to stop accumulating U.S. debt and start spending it, the result would be an increase in the supply of U.S. currency in circulation. In return, this would drive the value of the dollar down, making American goods less expensive; moreover, American corporations and companies would become large targets for foreign acquisitions.

America’s indebtedness to China is very endangering, especially given China’s current state in the economy. If China decides to fix its banking system problem and start to spend rather than save, Edwin Truman (pictured), who directed the Federal Reserve System’s Division of International Finance for 20 years, warns that the United States will probably be well on its to a “catastrophic disaster on the scale of the Great Depression or worse.”