Borrowing from China

The talks by our Secretary of State and Secretary of the Treasury with the Chinese about U.S. borrowing have once again created some mushy commentary by the talking heads. They speak in terms of how much U.S. debt China will be willing to buy in the short-term and in the long-term.

No one has thought to mention that those amounts depend almost entirely on the volume and balance of trade between the two countries. If the U.S. trade deficit (and Chinese surplus) grows, it will be necessary to borrow more to finance it. If trade shrinks, less borrowing will take place.

If the willingness to borrow changes independently of the financing needs of trade, then the trade will have to adjust. Either way, the two are linked, and it is foolish to talk about them as if there is no relationship at all.