The credit crisis has put a spotlight on the flow of money from the US to China - and back, through the purchase of US Treasury bonds. The relationship seems to defy logic, as if one country were paying another to buy its products.
I'm reminded of a science project I did in the sixth grade, a modified balsa wood airplane. Like other such craft, it had a propeller at the front. Typically, the propeller would be powered by a wound rubber band, to which it was directly attached. (Get your own here!) My innovation was to eliminate the rubber band and connect the propeller, by means of a crude gear, to a paddle wheel further back. No child prodigy, I imagined that air flowing past the airplane would spin the paddle wheel, which would turn the propeller, which would pull the airplane through the air, which would spin the paddle wheel, which would.... You get the idea.
Mrs. Birch, the school principal, complimented my imagination, sweet lady. "But you know, of course, that perpetual motion is impossible," she added. Yes, I nodded cautiously, wondering what "perpetual motion" meant.
I'm no longer a stranger to the laws of thermodynamics. Indeed, I often see analogous relationships in unlikely places - such as America's trade deficit and debtor status. The economy isn't a closed system, however, and new wealth is being created all the time, sometimes even more quickly than it is destroyed. Likewise, the long-term trend in living standards does not suggest entropic decay.
Still, there does seem to be something fundamentally unsustainable going on. The Chinese government has been worried for some time. Last week, a former vice-chairman of the Standing Committee and the current head of China's green energy drive, Cheng Siwei, said Beijing was not pleased that the US Federal Reserve had resorted to buying US treasury bonds, essentially printing money to buy its own debt. "If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard," he was quoted as saying in the UK's Daily Telegraph.
That's pretty much what happened to my airplane: it fell hard. But that's science, right? With the economy, on the other hand - the stakes are a bit higher. And yet, I wonder: Are we like test pilots in a jumbo jet designed by a child?