Harry Reid letter

Sen. Harry Reid doesn't know what he is talking about:

In the trade area, U.S. policy needs a major overhaul. The U.S. trade deficit with China is on pace to exceed $200 billion this year. Until 1999, the U.S. trade deficit with the entire world had never exceeded that staggering amount. In order to fund the deficit, the United States has had to borrow heavily from the Government of China – meaning China now has influence over U.S. interest rates. I urge you to use your visit to raise a number of trade issues with President Hu.

This is not correct. The U.S. government does not borrow money to fund the trade deficit, it borrows money to fund the fiscal deficit. There's a big difference between the two. As long as the Federal Reserve doesn't have to sell bonds to fund the deficit China cannot have any influence over U.S. interest rates. Further, the evidence that interest rates are related to the fiscal deficit is not at all clear, as recent huge deficits coincided with low interest rates while the late 90s saw interest rates increase even as we had budget surpluses.

:

In any case if Harry Reid was truly interested in eliminating Chinese influence he would push for big spending cuts to get our fiscal house back in order. But I'm not going to hold my breath.

:

Update: Even as the U.S. trade deficit swells investment the U.S. is also increasing (via polipundit). In fact, there is a big debate among economists as to whether the trade deficit drives investment in the U.S. (foreigners looking to invest their excess dollars) or investment drives the trade deficit (as I believe).