In the new global economy, almost everything's connected to everything else. Case in point: China will let its currency rise against the dollar and America's housing bubble will burst.
Let me explain. The housing bubble has been pumped up by low mortgage rates which have made it easy for lots of people to buy a house. Or two. Other major investments require more capital up front. But with mortgage rates this low, housing has become the major investment for average Americans who haven't saved much of anything.
Bubbles form when it's easy to get capital to invest in something, and when investors assume that somebody else will come along after them and pay even more for it. So as long as mortgage interest rates stay low, the housing bubble is likely to grow. It seems that no matter how much a house costs, buyers assume that a future buyer will come along and pay even more -- because that future buyer can get the money just as easily.
But beware this logic. When mortgage rates rise, the psychology will shift. Buyers can no longer assume that future buyers will pay more, because some future buyers won't be able to. And when the psychology shifts, the bubble bursts.
Here's where the China connection comes in. A major reason why mortgage rates have stayed low is that there's a lot of money around. And much of that money has been coming from abroad. China and the rest of Asia have been putting their spare cash into America, in order to prop up the dollar and make it easier for them to export to us.
But that's about the change. We've been pressuring them to let their currency rise, and they're getting the message. We don't know yet how much they'll let it rise. But the writing's on the wall, in Chinese characters. And other Asian nations are following China's lead.
You don't have to be a zen master to see this means less Asian money flowing into the United States. Which in turn means long-term interest rates -- including mortgage rates -- will start to rise. It's just supply and demand: less money around, and the cost of borrowing goes up.
As a result, the housing bubble bursts. I can't give you an exact date. It depends how fast China and the rest of Asia unleash their currencies.
Moral of the story, as told to American policymakers who have been pressuring China to revalue: Be careful what you wish for.
Robert B. Reich is co-founder of The American Prospect. A version of this column appeared on Marketplace.
