Those crazy kids in China and their addiction to saving. None other than Ben Bernanke postulated, in 2005, that a Chinese savings glut was forcing down interest rates as the Chinese loaned money to the United States to bankroll consumption, in a cycle that would have to someday end. The administration poked; the administration prodded (gently, mind you). John Snow all but forced credit cards into Chinese hands. Their own government started a spend-spend-spend propaganda campaign.

And what did they do? They kept socking away money! Can you believe the GALL of that?

Now, this article from the NYT’s The Reckoning series take a look at how Chinese savings bankrolled American consumption, and vice versa (h/t Everett Stuckey for the link):

In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States.

China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.

You know, this didn’t necessarily have to be a bad thing. Leverage comes in all shapes and sizes, and you can do something productive with it, like build a factory, or get some learnin’, or, I dunno, take care of your crumbling infrastructure or something. To wit, some history:

In the 19th century, the United States built its railroads with capital borrowed from the British.

But Americans did not use the lower-cost money afforded by Chinese investment to build a 21st-century equivalent of the railroads. Instead, the government engaged in a costly war in Iraq, and consumers used loose credit to buy sport utility vehicles and larger homes. Banks and investors, eagerly seeking higher interest rates in this easy-money environment, created risky new securities like collateralized debt obligations.

In the past decade, China arguably enabled an American boom. Low-cost Chinese goods helped keep a lid on inflation, while the flood of Chinese investment helped the government finance mortgages and a public debt of close to $11 trillion.

People like SUVs and cheap stuff from the big box stores, and politicians (for the most part) like the military-industrial complex, so we kind of went with it for a while.  We bought stuff, China bought our debt, China pegged their exchange rate to keep stuff cheap, and everyone was happy, until a couple guys in Congress started grumbling. They were more concerned about cheap Chinese stuff hurting American jobs than anything else, and the effect they were able to cause to exchange rates was negligible:

[W]hen Beijing acted to amend its currency policy in 2005, under heavy pressure from Congress and the White House, it moved cautiously. The renminbi was allowed to climb only 2 percent. The Communist Party opted for only incremental adjustments to its economic model after a decade of fast growth. Little changed: China’s exports kept soaring and investment poured into steel mills and garment factories.

Hank and Ben took over the crusade in 2006, and similarly, are considered to have accomplished a whole lot of not much:

In late 2006, Mr. Paulson invited Mr. Bernanke to accompany him to Beijing. Mr. Bernanke used the occasion to deliver a blunt speech to the Chinese Academy of Social Sciences, in which he advised the Chinese to reorient their economy and revalue their currency.

At the last minute, however, Mr. Bernanke deleted a reference to the exchange rate being an “effective subsidy” for Chinese exports, out of fear that it could be used as a pretext for a trade lawsuit against China.

Critics detected a pattern. They noted that in its twice-yearly reports to Congress about trading partners, the Treasury Department had never branded China a currency manipulator.

We can think of a few terms they could have used, had they not wanted to throw that nasty “manipulation” word around – currency “massager,” currency “artiste,” currency “juggler,” perhaps – but they didn’t. So the deficit bloat grew and grew, and just like we’re used to buying cheap stuff at Wal-Mart, China’s gotten kind of used to selling it to us. They’ve got layoffs, and they fear riots. There’s pressure to devalue the renminbi again. China has  rate cuts, and epic fiscal stimulus (sound familiar?) – and now we’re auctioning off Treasuries every day to finance the TARP, with more auctions on the way to bankroll whatever stimulus we get from the next administration.

Geithner should have fun balancing this one out.  I suspect it will keep Jason and me in material for a while.