The National Debt and A Loan Shark Named China

BY Glen Tschirgi
6 years, 1 month ago

This article in CNBC.com yesterday highlights the lengths to which the U.S. government went to appease China during the fiscal crisis of 2008 and 2009.

Confidential diplomatic cables from the U.S. embassies in Beijing and Hong Kong lay bare China’s growing influence as America’s largest creditor.As the U.S. Federal Reserve grappled with the aftershocks of financial crisis, the Chinese, like many others, suffered huge losses from their investments in American financial firms — from Lehman Brothers to the Primary Reserve Fund, the money market fund that broke the buck.

The cables, obtained by WikiLeaks, show that escalating Chinese pressure prompted a procession of soothing visits from the U.S. Treasury Department.

In one striking instance, a top Chinese money manager directly asked U.S. Treasury Secretary Timothy Geithner for a favor.

Lest anyone think that China’s obvious leverage does not affect our foreign policy, there is this:

The concern in certain influential Washington and Wall Street circles is that Beijing would leverage its position as the main enabler of U.S. overspending. And the cables provide a glimpse into how much politics inform relations between the world’s two largest economies.

One cable cites Chinese money managers expressing concern that U.S. arms sales to Taiwan — a major, longstanding irritant in the relationship — could sour the Chinese public on Treasury purchases.

Get that?  It is the “Chinese public” that is so concerned about arms sales to Taiwan.  The authoritarians in Beijing are at the mercy of public opinion.  Who knew? I guess another Tienanmen Square is about to break out any time now.

Is there any better example of the malignancy of our soaring debt than this?

China has the Treasury Secretary running to them with assurances that their investments will be protected, at a time when American pension funds and ordinary American investors are taking massive losses.

Not only that, China more or less demands that its plan to buy over $1 Billion of Morgan Stanley shares get immediate Treasury Department approval (rather than wait the customary 2-week review period) and, magically, the approval is obtained the next day, without any formal application having been filed.

And, oh, by the way, the Chinese public is very concerned about arms sales to Taiwan so the U.S. had better knock that off, too.  (And the Chinese public is also very concerned about any actions that might interfere with Iran’s nuclear weapons program).

One of the unmistakable messages from this article is that China exercises enormous leverage simply by threatening to stop buying up U.S. treasury bonds.   Although the article also claims that China needs to buy treasuries, the article never explains or supports that claim.  The “need” is clearly a one-way street.   China has other places to invest their cash whereas the U.S. cannot find any, other investor that can buy up treasury bills on anything like the scale of China.

This should serve as an urgent wake-up call, particularly to those in Congress who are debating the remaining funding of the federal government for 2011 and the budget for 2012.  The U.S. simply cannot afford to get any deeper into debt, especially not with China.

In our own, personal lives, it is one thing to take a short-term loan from a friendly relative.  No one in their right mind would get deeply in debt to a hostile co-worker.  What the U.S. is doing amounts to getting into deep debt with a loan shark.  Even a community organizer should have some experience with that outcome.

Make no mistake, the only reason that the U.S. has not gone off the financial cliff at this point is because we continue to enjoy incredibly low borrowing costs for our bond sales.  The article makes clear that there is a direct connection between China’s actions in the U.S. debt market and the interest rate that the U.S. has to pay on its short-term and long-term borrowing.  If the cost to the U.S. of borrowing rises in any substantial way, interest payments will eat up huge amounts of the federal budget.   At that point, the U.S. will either have to default on that debt which would have calamitous consequences, or the U.S. will have to print huge amounts of money which would likely result in the kind of hyperinflation that hit, for example, Argentina in the late 1990’s.

Of course, China has to be careful.  It is not in their interest to push the U.S. into default or devaluation of the dollar.  And, as the article notes, the U.S. is the single, biggest purchaser of Chinese exports.  All the same, this is not “mutually assured destruction.”   This enormous leverage that China now holds over the U.S. can render us paper tigers, afraid to take any action that might upset or anger our Chinese overlords.   To put it in loan sharking terms:  while it may not be in China’s interest to kill us, there is plenty of pain that they can inflict short of death.

So, bearing all of this in mind, we are confronted with a President proposing a $3.8 Trillion 2012 budget that requires over $1.4 Trillion (!!) in new borrowing from China, among others.

This is beyond a “lack of leadership” as some have said.  Given the realities of our fiscal situation, I suggest that the President’s budget comes very close to a “high crime and misdemeanor.”

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Warbucks
Guest

When you play the Hasbro game, “Monopoly” … http://www.hasbro.com/monopoly/en_US/ …. enough, it eventually turns into a game of life lessons. One such lesson is the perception that “winning everything” may have some very destabilizing consequences …. particularly if the one you always beat, is the player that owns the game board.

If you want to continue to play, never cause a “calamity.” Let everyone come out ahead some time or the other.

But that’s just a game. Surely there is no parallel to real life… right?

burkbraun
Member

Hi, Captain’s Journal-

I believe you miscontruct the situation, and it would be sad indeed if our officials believe that they somehow owe any favors to China for these financial reasons.

China is buying and sterilizing dollars for their own reasons- to keep their export machine going, keep employment high, and civil strife at bay. The cost to them is that their living standards are lower than they otherwise would be if they actually spent all those dollars.

We routinely beg them to lay off and let their currency float, which would have the effect of lowering their treasury purchases, but also of raising employment and trade balances here in the US.

We benefit from cordial relations with China, but we don’t owe them anything in a financial sense. Their classic mercantilist strategy is already damaging and adversarial enough, though it does indeed enable, allow, and even require us to run eye-popping deficits for the time being.

Herschel Smith
Admin

Burk, I’ll let Glen respond more fully to your other points, but let’s be clear about one thing. Nothing – NOTHING – requires us to run eye-popping deficits. We don’t have to be off of the gold standard, we don’t have to engage in trade with China, we don’t have to sustain debt and make interest payments, we don’t have to operate according to failed Keynesian economics. We choose to do many things we don’t have to do. Or should I be clearer in my emphasis: FAILED Keynesian economics. It cannot possibly succeed in the long run. Believers in Keynesian economics are fools.

burkbraun
Member
Hi, Herschel- Indeed we don’t have to do any of these things. We don’t even have to use money. We could live in caves and barter. But if you take some time to understand macroeconomics, you might realize that we benefit greatly from trade with China, and they benefit as well. We get different things, but would all be yet better off if the trade (and financial flows) were more balanced. And insofar as we promote free trade and benefit from it, and run the world’s reserve currency and benefit from that as well, we have to run large deficits. It really seems like a small price to pay, whatever one’s view of the morality or immorality of a deficit position. With regard to Keynesian economics, it has been the only thing keeping the current recession from turning into a depression. All economists will concur, except the most rabid Austrians/Republicans. It is also generally superior in its analysis of macro economics, but obviously we don’t have the space to get into that in any detail. Our prosperity of the 50’s and 60’s was run by Keynesian economics. Conversely, the decline of the middle class over the last few decades is… Read more »
Herschel Smith
Admin

Burk, your tone is condescending, and for no good reason. You don’t know as much as you think you do, and I have taken some time to understand economics.

My views are too involved to attempt to outline in a comment, but I didn’t say that Keynesian economics couldn’t work FOR A TIME. It certainly can. It’s fun for me to spend more money than I have, too, for a while.

The alternative to Keynesian economics is not living in caves. You’ve given us a Hobson’s choice, which is what people do when they really don’t want their own views to be opened up to scrutiny.

I’m saying that you are closed-minded person.

Warbucks
Member

Dr. Milton Friedman had a way of simplifying the complex and bringing economics down to my level: http://www.youtube.com/watch?v=p88XH11R7J0&feature=player_embedded

burkbraun
Member

Here is recent coverage of Bernanke’s thinking. Now he ain’t perfect, but he does understand what I am talking about above. Read his actual remarks as well, where he excoriates China for saving too much, for sterilizing its trade surpluses, and putting deflationary pressure on the rest of us (i.e. the US). He isn’t thanking them for buying bonds.. quite the opposite.

http://www.marketwatch.com/story/bernanke-defends-qe2-on-global-stage-2011-02-18?dist=countdown

http://www.federalreserve.gov/newsevents/speech/bernanke20110218a.htm

Note as well how Bernanke comments on the structural problems of the gold standard.. a relic we are well rid of, which led to a century of booms and busts prior to the great depression. Sure, fiat money puts marginally more responsibility on the federal government. But unless we lose our minds to crackpot economic theories, we have the expertise to deal with it, and benefit greatly from it.

Herschel Smith
Admin
Oh goodness. Please drop it. You are under the mistaken impression that I (or we) simply don’t understand this stuff. I do. I understand their concern for macroeconomic inefficiencies, under-consumption, under-growth, and so on and so forth. It’s why you (and they) supported the stimulus. It all goes hand in hand with your overall world view. You are a statist. You believe in the power of the state to do anything and everything, from liberating people, to changing hearts and rehabilitating criminals, to controlling crime by gun legislation, to redistributing wealth, to handling the economy by managing monetary policy, interest rates, cash influx to the system, national banking, and everything else. In short, there is no limit to the expanse of government control for you, because the state is god. It will all fail. The economy cannot be handled so efficiently and correctly as it can of its own accord. The state cannot create wealth, and the state cannot do anything other than screw something up (other than simple matters of administering justice and providing for the common defense). It’s a matter of world views, Burk. You are thinking myopically by thinking that you can re-educate people into seeing things… Read more »
burkbraun
Member
Hi, Herschel- It is curious that someone with such anarchic views would get involved in the military, our most socialistic and statist institution bar none. Our founding fathers were sick of the weakness of the articles of confederation and founded a strong state. The state undergirds everything we do- the legal system that “private” property relies on, the money, the corporate charter, the monopoly on violence. There is no way to get around it and wish it away. The absence of a state (i.e. rules) sends us into the Darwinian situation you saw in Iraq. It is the old Rosseau/Hobbes debate, (taken in naive form), and I think Hobbes wins hands-down. Not only is the state fundamental to our civilized condition, but our communal decisions, expressed through the state, are always sovereign over individual concerns. Thus the draft, the death penalty, and other state powers. We may, in our wisdom, communally agree on formal bounds to state powers, and individual rights & freedoms to further our happiness and comity, but these also are creatures of the state, not written down in any celestial or DNA code. They are definitely not inalienable. Without the state, we are left naked, without any… Read more »
Herschel Smith
Admin
I’m going to go yet another round with this, and then we’re going to let it go. To be honest, you have a blog (a well-designed blog) and you should advocate your views there. But I feel that I haven’t been clear enough with you. Obviously I need to be less nuanced, or make fewer assumptions about you and what you know. (1) My views are not anarchic. You would be surprised how many conservatives there are out there. You need to expand the circle that you “run” in. (2) It’s interesting that you would refer to the military as a “socialistic” institution. Depending upon what you mean, you clearly have no idea what you’re talking about. The military has the reputation of being the most merit-based organization on earth. As far as being a statist institution, I’m not sure what you mean, but let me clarify your understanding. A Christian like me can easily advocate a less intrusive state on Biblical grounds, but also advocate a strong military and a state that administers justice because Paul granted the power of the sword to the state in Romans 13. (3) Our founding fathers founded a country that focused power down,… Read more »
Warbucks
Guest

I love this discussion. It took me nearly 7-decades to land on an extraordinary answer to The Captain’s prime question: “How do you know what you know? What is your source of truth?” http://tinyurl.com/28l5qvq

trackback
nuclear arms reduction, nuclear disarmament | all you need to know about a nuclear missile

[…] US, Russia launch nuclear arms reduction pact US Secretary of State Hillary Clinton launched a landmark nuclear arms reduction pact with Russia on Saturday, a showpiece of Washington’s “reset” of ties with its former Cold War enemy. Read more on AFP via Yahoo! Singapore News Also you can take a look at this related read: http://www.captainsjournal.com/2011/02/18/the-national-debt-and-a-loan-shark-named-china/ […]

Shephard
Guest

Why does nobody in US see that there might be a war between USA and China over America’s national debt ‘execution’ in next 20-30 years?

TSAlfabet
Member
Shephard: That which is unthinkable or laughable today, is all too often the reality of tomorrow. War between Red China and the U.S. ? Easily forseen. And actually, from what I have read, the Pentagon puts quite a bit of thought into China’s steadily rising military power. It is not difficult to imagine that Creditor China, faced with a default in payments by the U.S. or a radical devaluation of the dollar by the Treasury, decides (as many creditors do when faced with the prospect of non-payment) to seize some “collateral” that has actual value. What collateral belonging to the U.S. might China want to grab? How about oil-rich Alaska? The U.S. sure isn’t using it, so why not? Ridiculous? Maybe. But try projecting 10 or 15 years into the future (maybe less) and see a U.S. military that has been hollowed out like that of the U.K. by years of Leftists in Congress demanding cuts to Defense spending rather than allow even a dime of cuts to entitlements. The seizure of Alaska, one of the least populated States, would not be difficult if the Chinese military continues to grow and the U.S. military continues to shrink. It seems inconceivable… Read more »
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This article is filed under the category(s) Obama Administration and was published February 18th, 2011 by Glen Tschirgi.

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