Two to tango

How did China help inflate the massive U.S. housing bubble? They lent our country cheap money, so that we would use that money to buy their stuff. (They did this because A) export industries help boost a country's productivity level, and B) export industries create jobs that keep the people from rioting.)

How did we allow this to happen? We over-borrowed and over-consumed, yes, but we also elected Republican politicians who were intent on buying our votes with massive deficit spending. We wanted a big military, but unlike in previous military buildups we didn't want to pay any taxes. So we let ourselves believe the Republican fantasy that cutting taxes pays for itself. Which it doesn't.

So to pay for the big fat military, the Republicans had to issue Treasury bonds, which were almost all bought by China. That kept long-term interest rates low, making it cheap to take out mortgages. Cheaper than it otherwise would have been. Which made it more profitable for the finance industry to bundle the mortgages into CDOs and yada yada, kicking off the housing bubble.

And here we are today.

Lesson: if you want to consume, you have to produce. If you want a huge military, you have to have high taxes. And if you ignore these facts for too long, you're in for a world of hurt.