What does China make for Americans? China makes GI Joes, China makes some GAP jeans, and China makes flat-screen tvs so we can watch the Superbowl. China makes something else, too. China makes bubbles. No, not bubble gum bubbles, but financial bubbles. And they are far more dangerous when they pop.

China loves to export. And why not, since exports have lifted 200 million Chinese out of poverty.  In 2011, Americans will buy about $375b from China.  But to keep its exports attractive, China stomps on the value of its own currency.  How?  By buying our Treasury notes.  What’s the outcome? We end up with lower interest rates; they end up buying less from us. We end up buying cheaper GAP jeans and GI Joes; they end up with our money. Now low rates, cheap clothing and toys are good, but when they are artificially low, it messes up our spending priorities. Americans end up going on borrowing binges because the money looks free. Then we go on buying binges at the stores because all the stuff coming off the ships from China look so cheap.

I’m all for China making tv, toys and blue-jeans. But we should worry when these trinkets come hitched to bubbles that keep popping in our faces and blowing up our portfolios.

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