What Happens When Money Flows Uphill

Forbes: Helen H. Wang

Many people in the U. S. believe that the Chinese currency yuan is undervalued by 25-40 percent, which causes large trade deficits between the U. S. and China and costs hundreds of thousands of American jobs. Last month, the House of Representatives passed a bill that would allow the Commerce Department to impose tariffs on Chinese goods.

While there are many debates about the pros and cons of forcing the yuan to appreciate, few have paid attention to the root cause of America’s trade deficits. Stephen Roach pointed out that the United States has trade deficits with 90 countries around the world. The reason is that Americans don’t save. In 2009, America’s net saving rate was negative 2.3 percent. The United States has been borrowing from China and other countries to make up the gap.

To examine how America got itself into indebtedness, Nobel prize-winning economist Joseph Stiglitz argues that the current global financial system causes money to flow uphill from poor countries to rich countries, and it’s self-defeating. Continue reading