Blogger Doug Ott in ‘Yes and Not Yes’ notes in the annual report of Alleghany Insurance, their thought of the cause of the financial mess.
Over the following decade and a half, this currency policy contributed to stagnant U.S. household incomes (real median U.S. household income is lower today than it was in 1998), as U.S. labor could not compete with a massive, artificially priced Chinese labor pool due to the currency devaluation. The mechanism with which China (and other countries with pegged currencies) kept its currency artificially depressed was to recycle dollars into U.S. treasury securities and agency securities, thereby keeping U.S. interest rates artificially low, exporting deflation, and importing inflation. The prime beneficiary of this policy in the United States and other OECD (Organization for Economic Cooperation and Development) countries was the financial services industry, which took advantage of excessively easy money and low interest rates to fund credit expansion to middle class households, who sought to improve their standard of living despite stagnant incomes by borrowing to fund consumption.
see the whole excerpt and article here.
HKO comment- Greenspan also notice the impact foreign currency policy on our monetary and credit growth. There were many warnings about our failure to address the Chinese currency policy during the 1990’s, but few probably saw the disastrous outcome. It is our inability to accept short term pain that ultimately leads to such large corrections.