First China, which is particularly relevant as Obama announces a $634 billion "reserve fund" for health care reform over the next decade. (Though, in fairness, about half is paid for by tax increases, and the administration is looking for cost savings in Medicare and Medicaid to help cover the rest.)

Anyway, Brad Setser has been following purchases of U.S. debt and has picked up something extremely interesting. The bottom line is that the Chinese are buying a shrinking fraction of our Treasury bills and American households are replacing them: 

[T]oday’s world is very different from the world of 2005, 2006, 2007 or even the first half of 2008. The United States’ current account deficit is smaller, which means that there is less money for the surplus countries (in aggregate) to recycle back into the Treasury market. Nor are emerging market central banks recycling private capital inflows back into the Treasury and Agency market.

Conversely, America’s household savings rate has increased – and Americans, after long shunning low yielding Treasuries in favor of risk assets with more (potential) upside — have rediscovered the joy of knowing that you will get your money back, with a small amount of interest. ...

The rise in private savings and fall in private investment will allow the US government to borrow more even as the US economy as whole borrows less from the rest of the world. The key to the Treasuries rally in 2008 was the surge in private demand, not the strengthening of official demand [i.e., from foreign governments like China]. My guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.

As for Summers, here's the story: The president's top economic adviser was a highly accomplished policy debater as an undergrad at MIT. In the elimination round of a tournament at Boston University in the mid-70s, the opposing team was pushing a proposal it promised would fix a whole host of problems, including the current account deficit (which was actually just emerging back then and pretty tiny). Summers gradually knocked down all the other benefits over the course of the debate, until the current account fix was the only justification for the proposal. At which point Summers got up and said, "What these people are telling us is that we have a problem that's really bad and needs to be fixed by their policy. But the situation is that we get steel and televisions and automobiles from the Japanese, and, in return, we ship them little green pieces of paper." How is that a problem, he wanted to know.  

Suffice it to say, Summers won that round. "I just cracked up," recalls Greg Rosenbaum, a longtime friend who happened to be judging. "It was an interesting perspective on globalization." (Though rest assured, foreign creditors. As Rosenbaum quickly points out, this was a debating exercise, not an expression of how Summers actually felt or feels today...)

--Noam Scheiber