Wow, what a stretch. How could social security reform have anything to do with China's desire to regain control over Taiwan? This is only one example of the danger created by the U.S. dependence on foreign savings.

This week, the Chinese Parliament passed a law declaring that it will use non-peaceful means to prevent Taiwan's succession. The Chinese government argued that Taiwan is unreasonable in its refusal to negotiate its capitulation to the Chinese communists. Despite China's military buildup in recent years, the United States Navy stands in the way of China's ability to take Taiwan.

It is important to understand what creates a trade deficit. A trade deficit occurs when a nation's buying power exceeds its production. Anyone who has gone on a buying spree with a credit card learns that the credit card can provide buying power, which exceeds a person's earning power. At least this is true in the short-run. In recent years, the United States has been using its Chinese credit card to make up for a lack of U.S. savings with Chinese savings.

While I am the first to point out that the savings rate statistics used in the US are virtually useless, because they do not reflect the direct way in which American's now place their savings into the markets, this week's dismal trade deficit report highlights the fact that the United States lacks sufficient savings. Instead, we borrow the savings of other countries, most notably China.

The U.S. is currently running a bilateral trade deficit with China of approximately $200 billion dollars per year. When the U.S. pays China dollars for Chinese goods, the Chinese have been taking those excess dollars and purchasing U.S. Treasury bonds. This again gives the U.S. additional purchasing power. This is great while it lasts. After all, the US receives real TVs, Stereos, Clothes, toys, etc. in exchange for paper that costs nothing to produce. But, what do we lose in this process?

Having become dependent on loans from China, what would happen if the Chinese were willing to stop their lending, or dump their U.S. Treasury bonds on the market? The U.S. could rapidly find itself in a deep recession. The demand placed on remaining savings would increase interest rates significantly and plunge the economy into recession. The Federal Reserve might respond with a rapid expansion of the money supply, but that could push down the value of the dollar and risk inflation.

So, having become dependent on China and other countries to supply large amounts of their savings to the U.S., what would be the reaction of the United States to an attack on Taiwan? Would the United States be willing to sail into the Taiwan Straights knowing that the result will be sever economic hardship at home?

The United States has tried several strategies to convince American's to save over the last several decades. Leaders have talked about the virtues of savings. Congress has enacted numerous tax deferred savings programs. But despite all of these attempts, American's still fail to save adequate amounts. Thus, we keep borrowing from abroad and running large trade deficits.

The proposal for private retirement accounts as a part of Social Security is a proposal for involuntary savings. In other words, if all the attempts to convince American's to save voluntarily have failed, then an involuntary savings requirement might be the answer. An America free from dependence on foreign savings is an America capable of responding to foreign threats like the Chinese threat to Taiwan.