Would minimum wage hike mean lost jobs?

How can you explain the trade imbalance that exists? Using hypothetical numbers, if we buy $5 billion worth of merchandise from China and they buy $1 billion from the U.S., how is the difference made up? And how do we buy stuff from other countries with dollars? ... Wouldn't they rather have euros or yen?
--Keith W., Louisville, Ky.

Let’s start with the actual numbers — or at least as close to actual as you can get with government statistics. (We think they do a great job, by the way. Tracking every shipment of big screen TVs or tube socks can't be easy.)

In October, the latest month available, the U.S. shipped $4.9 billion worth of goods to China, according to the Census Bureau. They shipped us $29.3 billion in return.

That left an extra $24.4 billion in China — on top of the $202 billion it took in last year by selling more goods to the U.S. than it imported. Some those dollars stay put in Chinese banks; by some estimates, China holds nearly some $1 trillion in reserves of foreign currency. A lot of China’s extra dollars come back home when it buys U.S. Treasury securities, which our government sells to make up for the spending it can’t cover with taxes. As of October, China had stashed $345 billion in Treasury debt, the second biggest holder after Japan with $644 billion.

As long as the U.S. economy is strong, and China keeps buying those bonds, the party keeps going. China likes the arrangement because some of those dollars eventually wind up in the hands of Chinese workers, many of whom have been moving to the factories from rural farms in search of a higher standard of living. The U.S. likes the arrangement because Chinese purchases of Treasury bonds help keep interest rates low in the U.S.

But the party can’t go on forever, which is why Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke just visited Beijing to talk things over with Chinese leaders. The fear is that if the Chinese stop sending their dollars back to the U.S. to buy our debt, interest rates would likely go up and the dollar would go down, or both. If the move is gradual, it could have only mild side effects. If it happens suddenly, it could be very painful.

The situation is somewhat like global warming: There are many, many small players that contribute to the overall problem, and the short-term impact is almost impossible to see. But if we don’t begin to fix the problem, we could be in for a bundle of economic trouble down the road.

What’s the solution? The simple answer is: encourage Chinese consumers to buy more of our stuff and encourage Americans to save more money and buy Treasury debt. But Chinese consumers can’t afford our stuff — especially when they can buy cheap knockoffs that violate U.S. patents and copyright laws. American consumers should be able invest in Treasuries with all the money they have left over after buying cheap Chinese goods. But they’d rather use the money to buy more stuff.

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