Our Debt to China
Fascinating article by Noam Scheiber in The New Republic on the growing concerns the Chinese have about our fiscal course. As our biggest shareholder, so to speak, they are naturally concerned about our ability to continue servicing our debts. And they are becoming increasingly knowledgeable and sophisticated in their analysis of our fiscal problems. As Schieber writes:
"As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world's largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. "At some point, if you refuse to contain health care costs, you'll go bankrupt," says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. "It's widely known among [Chinese] policymakers." Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine--kind of the Chinese version of Fortune."
Read it all here:
http://www.tnr.com/article/economy/peking-over-our-shoulder
Just liek any relationship,
Just liek any relationship, they need us so we can buy their cheap goods, and we need them to buy our bonds so they can keep their money cheap. Just like this wonderful tidbit: If you owe the bank a million, you are in trouble; If you the bank a billion, the bank is in trouble. And creditor who lends that much to one entity shoudl know this (and they do). China also knows if they stop busying US dollars, the real excahnge rate will make Chinese imports much less attractive.
On another note, how much of your productive capacity can you outsource and still remain a viable nation?
Our debt to China
The Chinese are not our shareholders; they are our bondholders. We are the shareholders. Our management, like the managements of many risky entities, is betting the farm on the idea that our equity value can be raised. If it works we win, if not, the Chinese lose.