TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

University of Munich professor Hans-Werner Sinn nicely explains how Chinese capital allowed us to enjoy not saving any of our income:

Despite its withdrawal from financing the US government, China remains the world’s largest net capital exporter, a position that it has held since 2006. In 2007 and 2008, China exported on average about $400 billion of capital annually. The US, which at the time needed annual capital imports of $800 billion in order to offset the near total cessation of private savings, received the lion’s share of this capital. The unwillingness of the Chinese to consume enabled Americans to build new houses for many years on borrowed money and to maintain a level of consumption that the US economy was unable to finance on its own.

To be sure, the Chinese always restrained themselves from private real-estate financing in the US. They bought only government paper and securitized real-estate instruments that were issued by the semi-public bodies Fannie Mae and Freddie Mac. Direct real-estate finance via private channels came mainly from other countries – Germany, for example. Nevertheless, China helped the US to achieve a higher standard of living by making money available to government authorities that would otherwise have had to come from American taxpayers.

Given this history, it is a bit shabby to reproach China now for its exchange-rate policy – a policy that enabled the US to live beyond its means for so long. Rather than coming at the expense of the US, as is constantly claimed, it was the renminbi’s low valuation that allowed Americans to dream their American dream of universal homeownership. Imports of inexpensive Chinese products freed up capital and labor in the US for a dramatic expansion of the housing stock – which led to a sharp rise in the American standard of living.

Actually, I think he weakens his argument unnecessarily. Not only did China provide funding for the GSEs, but since the GSEs owned four trillion dollars of an eleven trillion dollar mortgage market, they helped fund our housing bubble, too.

But he’s right that China’s central economic policy since the 1990s—develop infrastructure and focus on exports—made China flush with cash that it needed to invest somewhere. China’s policy to keep their currency cheap relative to the dollar was integral for their economic policy. Their cheap currency, which reduced the price of their exports to make them more competitive, led to large dollar reserves which funded our lack of saving and housing boom, but it also provided affordable Chinese products for Americans, which effectively increased our standard of living.

China didn’t somehow screw us, we screwed ourselves. They provided the funds for us to live extravagantly, to take from our future so we could enjoy ourselves now, and we did.

China didn’t invest their dollar reserves in Fannie Mae and Freddie Mac because they wanted to inflate our housing market; rather, they invested in it because they provided a steady, guaranteed return. The GSEs provided a nice return without any risk, because they had the implicit backing of the U.S. government. Our housing policy created that opportunity for them to invest in—our policy that homeownership should be cheaper, and that people who can’t afford to own a home, should. We decided that rather than investing in new industries and innovation, in our futures, we plowed private and public capital into funding a housing boom.

That’s the choice we made, to invest in what amounts to a ponzi scheme, and now we are suffering as a result. This isn’t China’s fault, and it isn’t their responsibility to bail us out. It is our responsibility, and we must fix it. Blaming them isn’t going to help.