This recent report from Telegraph of China's worry that the US is going to inflate away its debt:

Read the full report here.

Fortune’s impression about China: the massive, massive infrastructure build-out, the biggest in the history of humanity.

The fast growing Chinese economy posts many challenges to the world. One of such is pollution. In 2002 during his visit to Baylor University, I asked Robert Fogel, the Nobel-winning Chicago economic historian, about his view on China’s pollution problem. His answer was startlingly simple —Just compare today’s China to Chicago in the early 20th century: Chicago back then was a fast growing dirty butcher town and transportation hub, and now look at what Chicago has become.

The message conveyed in Fogel’s simple answer is two fold: 1) for poor countries, the concern over economic development naturally dominates the concern over environment; 2) Chinese will have the greatest incentives to cure their pollution problem once they realize this can’t go on forever. For this matter, I always think China will come out as the world leader in energy efficiency innovation. Why? China faces the gravest energy challenges so the greatest pressure to innovate and break through in energy-saving technology. What will push such innovation to happen faster is crisis. Yes, I do think China needs (and possibly will have) multiple mini energy crises to make this pressure even greater. But I am optimistic.

An excellent panel discussion on What’s Next for the American economy, with Joseph Stiglitz of Columbia University, Meredith Whitney of Meredith Whitney Advisory Group, Oliver Sarkozy of Carlyle Group, Jack Welch, former General Electric CEO and Austan Goolsbee of White House Senior Economic Adviser.

Part I

Part II

In this short YouTube video, Milton Friedman explains why the US has been so attractive to investors worldwide in the past; and under what condition such appeal may disappear.

I also made a chart a couple of months ago summarizing China’s recent effort starting to use its own currency, Renminbi, in international trade and signed numerous currency swap agreements with a bunch of countries. And China and Brazil are in a similar talk recently.

I don’t think for these actions China aims to replace the dollar. What Chinese government really worries about is their huge dollar-denominated asset holdings (70% of nearly $2 trillion foreign reserves) may lose value big time if the dollar drops precipitously in the future.

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With economic recovery around the corner, the US should stop its money printing machine. “Ignore it at your own peril”—the US may well be on its path to destroy its economy and its reputation among countries. Watch this classic Friedman 1980 video on inflation, “Inflation is just like alcoholsim. In both cases, when you start drinking, or you start printing too much money, the good effect comes first, and the bad effects only come later. That’s why in both cases, there is a strong temptation to overdo it: to drink too much and to print too much money…”

Government and politicians have a tendency to use inflation to get out of their debt problem. Call it “debt monetization”. Here is a great chart from Casey’s Chart.

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“The costs of things as measured by the consumer price index have risen twentyfold since the Federal Reserve Act of 1913. This act empowered the central bank to create and control a new currency for the United States, the Federal Reserve Note. Over this same period, the federal deficit soared from $2 billion to over $11 trillion. Coincidence? We think not.

After President Nixon cut the dollar’s ties to gold, funding the whims of government was no longer burdened by the need for higher taxes. Now any gaps in the budget can be filled by simply printing more dollars. And as you can see, the politicians didn’t hesitate to meet the challenge. Price levels and federal debt have risen hand-in-hand ever since.

The hidden tax of inflation has been stealing people’s buying power for nearly a century, but the opportunity to profit from it only comes about once every generation…”

Following my previous post on China’s higher education boom/bubble, here I share with you another interesting research by Harvard labor economist Richard Freeman on how the global boom of higher education, especially in developing countries, has impacted on the US.

Exhibit 1 (all graphs are taken from Freeman’s NBER working paper) shows country’s share of global college enrollment.

In 2006, the US accounts for 12% of total college enrollment globally. But watch how China and India, the two most populous countries, how their college enrollments have soared over the years. China’s college enrollments rose from 1.7 million in 1980 to 23.4 million in 2006, or 16.5% of the world total.

A lot of college graduates from developing countries, seeking better opportunities, came to the United States. The chart below shows you the major source countries of international students in the US.

In the 2006-07 period, among 580K international students in the US, 2/3 are from Asia; 85% from developing countries: with India supplying the most, nearly 15%; China 12%; South Korea 10%. And nearly half (45%) of international students came to the US to pursue graduate degrees.

A lot of international students went to science & engineering (S&E) field. In 2005, 50.9% of PhD degrees in S&E were granted to foreign-born international students. If we just look at engineering, the number was at startling 69% (I believe the number is about the same in economics).

Focus on China: The number of students who came to the US to study and eventually got their PhD degrees in natural sciences has been rising sharply, especially after 1990s. (see graph below; the following graphs were taken from another NBER research by Bound, Turner & Walsh)

Meanwhile fewer and fewer US-born college graduates went to pursue PhD degrees. This is especially true in life sciences and physical sciences. I am not quite sure how this happened: it could be due to the education problem in US high school system; it could also be higher pay in other sectors, such as financials and investment banking.

But I suspect the surge of foreign PhDs in the US was largely a supply story. Why? The graph below looks at the correlation between the number of Bachelor degree holders and the PhD degrees granted in the US to foreign students. As you can see, there is an obviously strong positive correlation between the two.

Also, we have witnessed a cross-board surge of international students, almost in every field, not only in the science and engineering field.

Now we come to the policy delibrations.

With more and more PhD degrees granted to international students, foreign-born researchers and academics are sure to play a more and more important role in US higher education and research in coming years. A policy question naturally rises as to how to retain these foreign researchers. And what changes in US immigration policy should be in place to acheive the goal?