 | , predicted that within two years, America’s lenders would balk at providing additional funds and the U.S. economy would risk a recession. Oh really? In 2006, China bought an estimated $250 billion in dollar assets. In the first quarter of 2007, it purchased at least $100 billion more, according to Setser. Some analysts did recognize the potential durability of vendor financing. In a series of articles published in 2003 and 2004, Michael Dooley, David Folkerts-Landau, and Peter Garber, three economists then connected to Deutsche Bank, argued that it could last a generation, until the Chinese economy had absorbed the country’s enormous pool of rural laborers into factories. The trio explained how China benefits from financing our profligacy. In the past two decades, it has transformed itself from a rural country into the world’s second-largest exporter, after Germany (the U.S. now ranks third). From the perspective of Beijing, investing hundreds of billions of dollars in low-yielding Treasury bonds is a modest price to pay for keeping U.S. markets open to Chinese goods and gaining access to U.S. industrial technology.
Media accounts of Sino-U.S. dealings tend to ignore this reality. Treasury Secretary Hank Paulson flies to Beijing to chide China for not instituting more reforms, including currency revaluation. Chinese vice premier Wu Yi politely tells him to shove off. (Cue headlines about rising tension between Washington and Beijing.) But the very idea of Paulson lecturing the Chinese is an absurdity akin to a shopaholic lecturing his credit-card company on the need for lower monthly interest rates. The Treasury secretary’s trip was an elaborate charade designed to discourage Congress from slapping tariffs on China. The U.S. and China have a symbiotic relationship that neither side can afford to disrupt. Partly for this reason, much of Wall Street is remarkably sanguine about the U.S.’s growing indebtedness. A while ago, I had dinner with a big-time investor, who told me to quit worrying: The foreigners won’t stop buying Treasurys anytime soon, he said. They need to park their money somewhere, and the U.S. still provides the most hospitable environment for itinerant capital.
Perhaps my dinner partner was right. He’s made a lot of money betting on his optimistic outlook. Many of the skeptics, meanwhile, have been silenced. In April, Stephen Roach, the veteran chief economist at Morgan Stanley—who in November 2004 predicted an “economic Armageddon”—was “promoted” to head the firm’s Asian operations, a position in which he no longer opines on behalf of the company. Given my sorry record as a real estate prognosticator, I should probably leave it at that, but I can’t resist adding a historical note: During any period of intense speculation, there are signs that a peak is approaching. These include relaxed credit standards, a glut of inexperienced buyers, elaborate theories that justify rising prices, a lack of dissent, and more and more media outlets focused on the speculation. During the bull market of the mid-1980s, stock-market newsletters proliferated. In the late ’90s, there were CNBC and financial bulletin boards on websites like Yahoo Finance, where small investors swapped stories about high-flying internet stocks. There are dozens of real estate websites that critique and track the progress of new listings in Brooklyn. My wife and many of our neighbors obsessively monitor these sites, which have names like Brownstoner, Curbed, and Property Shark. “Did you see the news about 152 Dean?” they whisper to each other when they meet on the street. “It just sold for $2.45 million—$150,000 over asking.” Suffice it to say, I do not take these communications as a bullish signal. I would develop this argument further, but my wife just asked me to look at a recent posting on Brownstoner. There’s a three-story fixer-upper close to the heavily polluted Gowanus Canal that’s a real steal at $1.1 million . . .
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