How an Economy Grows and Why It Crashes

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or years, economists have mischaracterized the 
relationship between the United States and China. 
Most see it as a mutually benefi cial system whereby the 
United States gets cheap products and cheap loans, and 
China gets manufacturing jobs. But is such an arrangement 
really a benefi t for both parties?  
The Americans do well: they get stuff without producing it 
and they get to borrow money without having to save. For 
their part, the Chinese get to work without consuming what 
they produce. 
They save, but they don’t get to borrow. Where’s the benefi t 
there? 
Most contemporary economic pundits also fail to appreciate 
the degree to which low interest rates in the United States are 
made possible by high savings rates abroad. Remember, in 
order to lend, someone has to save. Fortunately for the United 
States, the global economy allows these relationships to go 
beyond borders. 
The trump card for the United States thus far has been 
the status of the U.S. dollar. As the world’s offi cial reserve, 
the dollar is accepted as the exchange currency for any 
international transaction. This means that everyone, not just 
the United States and its trading partners, needs dollars to 
conduct trade. So even if no one actually buys things that are 
made in this country, dollars are always in demand. No other 
country has this monetary good fortune.