China Worried About U.S. Spending

By Alan Stewart Carl | Related entries in China, Economy, Spending

As every American in financial trouble knows, it’s never good when your creditors start asking questions. Well, today, the United State’s biggest creditor grumbled about our current spending.

China’s premier didn’t say it in so many words, but the implied warning to Washington was blunt: Don’t devalue the dollar through reckless spending.

Premier Wen Jiabao’s message is unlikely to be misunderstood at the White House. It is counting on Beijing to help pay for its stimulus package by buying U.S. bonds. China already is Washington’s biggest foreign creditor, with an estimated $1 trillion in U.S. government debt. A weaker dollar would erode the value of those assets.

“Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a news conference Friday after the closing of China’s annual legislative session. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

This reminds us of a very real fact behind the stimulus: we won’t get many, if any, do-overs if the package doesn’t work. Before we even hit this crisis, our debt was astronomical. As China is hinting, we shouldn’t count on being able to push that debt much further.

Sometimes I worry that politicians on both sides see our national debt as nothing more than an accounting nuisance. They never seem to concern themselves with how much of our future GDP will be sacrificed to nations like China once our debts become due. But those debts will become due and, as China reminded us today, our creditors are keeping a close eye on our financial strength. Let’s hope we’ll pull out of this recession stronger than ever so that the debt in which we’ve put ourselves never becomes an insurmountable problem.


This entry was posted on Friday, March 13th, 2009 and is filed under China, Economy, Spending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

23 Responses to “China Worried About U.S. Spending”

  1. SD3 Says:

    As China is hinting, we shouldn’t count on being able to push that debt much further.

    It’s a little late for that, isn’t it? I respectfully submit that it is mathamatically impossible for the U.S. to ever re-pay it’s funded & unfunded debt.

    Soon we won’t even be able to pay back the interest, not unlike our spend-thrift neighbors who bought McMansions on no-money-down, variable APR loans. What happened to the is going to happen to our nation.

    And when China fully realizes this fact, they, and everyone else who bought out dollars are going to dump them beffore they lose all their value.

    Trillions of dollars simultaneously hitting the economy. Know what that’s called? Weimar.

    I’m not saying this is going to happen next month, but you neeed to get out of the dollar while you still can.

  2. michael reynolds Says:

    SD3:

    Oy.

    It’s not trillions “simultaneously” hitting the economy. It’s just under a trillion in stim rolling out over a couple of years. The other “trillions” are largely theoretical at this point since we don’t actually know how screwed up the banks are and what we’re going to need to do to rescue them. It may be more trillions, but it may not be, and it isn’t yet.

    As for our inability to ever pay our debt, you allude to mathematics but provide no evidence. Explain the mathematical proof of default? Then relate the total amount of government debt to the economy and contrast it with a medical student and his debt load, or a homeowner (with a nice 30 year fixed) and his debt load.

    As for China: where else are they going to park their money? In their own currency? In Euros? Pounds? Yen? Maybe some Icelandic Krona?

    The Chinese have the same problem with us that we have with AIG: we’re too big to fail.

  3. SD3 Says:

    It’s not trillions “simultaneously” hitting the economy.
    It is when there’s a run on the dollar & Saudi, China, Britain and everybody else dumps them as fast as they can.

    The other “trillions” are largely theoretical at this point… What’s theoretical about T-bills & bonds? They’re quite real, and China is going to expect them to be repaid.

    As for China: where else are they going to park their money?
    Oh, I don’t know, how about in real estate? Millions of properties in America being sold for 60 cents on the dollar? NPR notes that it’s already happening: http://www.npr.org/templates/story/story.php?storyId=101234145
    Or commercial real estate and arable land? Mineral rights, precious metals, you name it.

  4. Nick Benjamin Says:

    It would be nice if Americans checked out the rest of the world before freaking about us. Our debt is a large portion of GDP, more than 60% according to Wikipedia:
    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    But other Industrialized countries operate with higher debt levels. Germany, France, Norway, Greece, Germany and Israel have more debt than we do. Japan’s debt is an astonishing 170% of GDP, and lately they’ve been having problems with deflation. So we have a little room to maneuver before we have to panic.

    I don’t think we’ll be able to borrow 170% of our GDP and still flirt with deflation like the Japanese do. But borrowing a few trillion won’t kill us either.

    BTW a little inflation wouldn’t be all bad. The mess started because individual Americans borrowed too much. If those folks could pay back the loans with inflated dollars lot of them would be much better off.

    Which leads to fewer foreclosures, which is good for every home-owner. It wouldn’t necessarily hurt renters much either — inflation would benefit them if wage inflation beat price inflation.

    Nick

  5. kranky kritter Says:

    Snoop, your prediction for the replacement favored global currency is what, precisely?

  6. SD3 Says:

    It’s not trillions “simultaneously” hitting the economy.
    It is when there’s a run on the dollar & Saudi, China, Britain and everybody else dumps them as fast as they can.

    The other “trillions” are largely theoretical at this point… What’s theoretical about T-bills & bonds? They’re quite real, and China is going to expect them to be repaid.

    I acknowledge there’s no imperical way to predict when a nation reaches insolvency. But if I woke up tomorrow and had debt on the order of 6 times my annual income (~80k, so that would be 480K in debt), with no assets to back up that debt, I’d venture to say that I’m insolvent. Our government has NOTHING to show for its ~57 trillion in funded and unfunded debt. It’s just liabilities.

    I don’t think comparing our national debt with someone who has a mortgage or medical school bills is valid, because those debts have intrinsic value. I.e., a house will always have real value, and a medical degree virtually guarantees high earning potential.

    As for China: where else are they going to park their money?
    Oh, I don’t know, how about in real estate? Millions of properties in America being sold for 60 cents on the dollar? NPR notes that it’s already happening: http://www.npr.org/templates/story/story.php?storyId=101234145
    Or commercial real estate and arable land? Mineral rights, precious metals, you name it.

  7. SD3 Says:

    Sorry for the duplicate.

    So we have a little room to maneuver before we have to panic.

    Buit where does it end, Ben. We’re accelerating towards an economic cliff – when do we change course or hit the brakes? Sadly, there is absolutely nothing to suggest that we’re ever going to reverse course.

    Snoop, your prediction for the replacement favored global currency is what, precisely? You know, I don’t have a good answer, but the free market will find one if we don’t.

    It might be as simple as an non-government-sanctioned return to precious metals. Back to the gold standard? Some EU leaders are calling for a new global currency, as bizarre as that sounds.

  8. michael reynolds Says:

    SD3:
    Your nightmare scenario is that the Chinese bring all their dollars back to the US and buy real estate thus propping up our home prices, cutting the number of defaults and saving our banks?

    Let me know when this is about to happen because I will so jump into real estate.

  9. SD3 Says:

    It doesn’t have to be here, necessarily, Mike. They could buy anywhere in the world they’d like. But even if it were here, the result would be severe inflation, grossly outpacing any perceived rise in home prices values.

  10. Jimmy the Dhimmi Says:

    Don’t forget that the Fed is printing an unknown amount of money to bail out the banks and such. Does anybody know how much debt is financed by foreign lenders and how much of the difference we are printing? We already have more than doubled the amount of currency in circulation over the past 3-6 months! We are trying to inflate our way out of this debt. Who is going to want to hold a T-bond if you are going to be able to buy less stuff with it when it matures?

    If those folks could pay back the loans with inflated dollars lot of them would be much better off.

    Yeah, but the lenders get hosed, and thats the point. The banks are already in bad shape and the Chinese are getting pissed off as the article implies.

    Also, more than 70% of our GDP is consumption (and its growing). That is a measure of how much wealth you destroy, not how much you produce. Nothing we do with our borrowed money is going to produce any substancial amount of weath for us to export back to our creditor nations.

  11. michael reynolds Says:

    SD3:

    So now you’re saying the Chinese will buy property in . . .where exactly? India?

    Look, China has almost as large an interest in the stability of the US economy now as we do. There is no safer haven for them. (In the land of the blind the one-eyed man is king.) And there’s no safer currency. As evidenced by the fact that the USD is up against the Euro and the Pound since the meltdown.

    What you’re not getting is that at worst we’re looking at a diminution in an amazingly affluent lifestyle. The Chinese, on the other hand, are looking at starvation and revolution. Right now they are not in a position to upset the apple cart, and they’ll do whatever they can to keep us afloat. If they try to stab us in the back they’re the ones who end up dead.

    Of course they don’t want us inflating the dollar. Neither do they want us deflating it. They very badly want us to pull this off and save their asses in the process.

    We are at a very weird moment in history: the whole world wants Obama to succeed. Well, all except the dwindling ranks of Republicans and of course, Al Qaeda.

  12. SD3 Says:

    …at worst we’re looking at a diminution in an amazingly affluent lifestyle. The Chinese, on the other hand, are looking at starvation and revolution.

    My brother, you are d-r-e-a-m-i-n-g. If you replaced “we’re” with “China”, and “the Chinese” with “Americans”, I’d agree with you 100%.

    The U.S. has no savings left. NONE. we spent it all on flat screen TVs and other useless shit. And now, we’re drowning in debt. You think ours is the preferred circumstance?

    The Chinese have trilllions in savings and no debt. They can do anything they want (and they are). They’re postured everything the rest of us can’t afford anymore for pennies on the dollar.

    Indeed we are at a very weird place in history. I feel badly for all my countrymen who aren’t preparing themselves and think this just needs a couple years and everything will be fine again.

    You seem to think this is about proving “once and for all” that republicans are wrong. There’s no fiscal difference between George Bush & Obama. None. But he’s your guy, isn’t he, and that’s all that matters.

  13. michael reynolds Says:

    SD3:

    Have you ever been outside of the country?

    In your fantasy world the dollar has collapsed and the US defaulted, right? So the Chinese would have nada. You need to temper your panic and at least make some kind of sense.

    China is a poor, poor country, and politically unstable, with a very long history of political instability. They are an inch away from chaos at the best of times. If we defaulted we’d be less rich, they’d be starving.

    Stop listening to crazy people on the radio, they’re making you look silly. It’s absurd to posit as you do that 1) the USD has crashed and burned and B) that the Chinese have trillions in USD’s so they’re rich, rich!

    The Chinese make toys for American children. If American children can’t buy toys they’ll be sad. But Chinese children will be hungry.

  14. Nick Benjamin Says:

    Yeah, but the lenders get hosed, and thats the point. The banks are already in bad shape and the Chinese are getting pissed off as the article implies.

    Would you rather have a loan repaid with inflated dollars, or lose your money completely? These next few months are going to suck for the banks no matter what happens because they made lots of bad loans. Inflation would devalue their loans, but it would also mske them more likely to be re-paid.

    And SD3, you’re a wee bit hysterical. As I said before the Japanese would have to spend every dime on debt repayment for a year-and-a-half to be debt-free. We’re at 7 months or so. So we’d have to blow our entire GDP on Mexican hookers to get into debt Japanese-style.

    Give Obama a chance. If there’s no recovery in a year or two we’ll be in deep shit. Until then this sucks, especially for the banks, but we ain’t on the brink of collapse.

  15. TerenceC Says:

    Capitalism operates on the premise that there is a large “pool” of capital constantly circulating helping all other areas of the economy grow as well. Confidence is what the whole system is built on (it’s a big F@#king shell game) – deficits don’t matter (unfortunately I am forced to quote Dick Cheney for that) as long as they don’t get in the way of the “pools” circulation.

    The US dollar is the currency of choice for the world (because that’s what’s used to pay for oil). There is only one economy in the world capable of absorbing all those US Treasuries China owns in the event they want to sell – ours. Who should worry more – the country with Trillions of dollars in debt – or the country who thought they could control another country by controlling it’s debt – never knowing that country has no intention of repaying should they be asked? The US shouldn’t be worried, but China should be scared to death.

  16. SD3 Says:

    Have you ever been outside of the country?

    Yes Mike. I’ve lived all over the world. Germany, Russia, Japan, Signapore, just to name a few. I had the incredibly educational experience of living (as an foreigner) in Moscow as their economy collapsed in 1993. It was a hell of a thing to see.

    China is a poor, poor country, and politically unstable, with a very long history of political instability.

    Frankly, Mike, I don’t think I’ve read anything quite that ignorant and short-sighted in quite some time.

    The Chinese make toys for American children.

    They DO, Mike. And they make a lot more than that. You see, the produce, while we consume, hence the abominable trade deficit.

    Let me offer you a free bachelor’s degree in econ, Mike:
    Producing things = good (China).
    Borrowing to consume things = bad (United States of the Shortsighted).

  17. rio real Says:

    Michael reynolds,

    The Chinese HAVE trillions in USD’s so they ARE rich, rich ~ so long as the US of A is doing well.

    The 2 countries are pretty much in the same boat together; with more sharks circling the Chinese side for now. If the boat did sink, the US may be downgraded to a country like say.. Canada (with a worse rep). It might just be enough on the other hand to spark regime change in China. Having your main loan shark crumble and fall certainly isn’t the worst of consequences.

    The dynamics of this is changing though. Assuming the likelihood that the USD does NOT tank in a dramatic way ~ we have Obama pouring billions of non existing funds to try to MAINTAIN the way of life in America, while the Chinese are spending billions of existing assets to IMPROVE the standard of living in their country. They have a stimulus package aimed at spurring internal consumption and they are using the crisis to weed out the weak, consolidate strong industries, and make a jump from manufacturing low value goods to high value ones. They’ll come out of this with a more highly skilled labor force, a stronger middle class, and an economy less dependent on exporting to the US. America will come out alive but weaker, still unable to compete with China in low end manufacturing, now needing fight against more Chinese high tech companies like Lenovo, as well as having an even harder time breaking into the massive Chinese market.
    The Chinese may be making toys for Americans now, but the way things are going they’ll be making toys, bikes, computers, cars, for their own 500 million kids and not giving a damn about the 50 million American kids soon.

  18. rio real Says:

    Now if China were to collapse first, even in the current frugal world economic climate, you’d get
    1) massive devaluing of just about all raw materials/resources from rice to nickel to oil,
    2) sudden global shortage of low value goods, some you can do without ~ slippers, underwear, teddybears, plastic toothpicks, and some that you’ll dearly miss ~ 70% of world’s supply of batteries, 70% of world’s supply of lightbulbs.
    3) sudden global shortage of high value goods (foreign brands made in china), think: lcd monitors, plasma tv screens, laptops (minus Sony brand)
    4) collapse of Walmart
    5) overall inflation of currencies and more ppl below the poverty line because they can’t afford expensive nonChinese products.
    6) more competition for specialized jobs as more Chinese intellectuals, skilled workers flee back to the west.
    7) Instability generally in Africa with the drying up of investment, aid, and political backing from China, many governments may indeed collapse.
    8) Destabilization of East Asia, with uncertainty regarding 2 of it’s 4 nuclear wielding countries : China and its ally N.Korea. Especially perilous times for Japan, S.Korea, Taiwan ~ all of which are American allies.

    In summary, if China’s economy or any other source sparks an unpeacefull change in power, the country will take the world through larges amounts of Shite with it.

  19. michael reynolds Says:

    SD3:

    That’s not a response. You said something utterly ridiculous: that the dollar would collapse and China would be rich. No one anywhere thinks that makes any sense.

    And now you’re throwing scat in the air trying to conceal your own mistake.

  20. SD3 Says:

    Mikey, China is a rising power, baby. I know you hate it, but they’re the new super power. Deny it at your own peril.

    Do they have flat sceens in every apartment now? No, but they’re on the road to power. And we’re (sadly) in terminal decline. They produce EVERYTHING the world buys.

    You’re one of the people I won’t pity when your house of cards comes down. Because it’s coming, Big Mike. And you are clearly woefully unprepared.

    Consider yourself ‘warned’.

  21. Jimmy the Dhimmi Says:

    Mike & SD3:

    Did you know that automobile sales in China are up 25% this year? As the chinese spend more of the money that they have saved, there will be less demand for T-bills to provide the interest on their savings accounts. Their living standards will rise, and ours will fall due to the falling value of our dollar. Inflation will cause Americans to be priced out of commodities like oil or food which the Chinese and other foreigners will be able to buy more of, once the pegs on the Yuan are broken (which will definitely happen if there is a run on the dollar).

    If all of the other asian countries follow this dynamic, they can trade with eachother and live better. Remember, they produce the goods and they have all the savings – not us.

    Both you guys should watch this video by Donklephant’s favorite soothsayer, Peter Schiff. Its worthwile to watch the whole thing (and the whole hour of clips if you have time), but if you are impatient, begin at 6:17 for a nifty analogy.

  22. RD Says:

    Our free trade policies (and lack of interest in attaining energy independence) have led to the U.S. becoming a debtor nation. Great nations continue to make things – not just borrow and consume. The trade deficit is a tremendous problem. Check out this video with Warren Buffett. http://www.youtube.com/watch?v=5DvuyvuHmJI&feature=channel_page A few years back, Buffett proposed the perfect trade deficit solution by suggesting a system of import-export certicates.

    I am not a fundamentalist about deficit spending. Increasing spending on infrastructure can help to stimulate the economy but we will have to raise taxes especially on the upper income groups and revitalize American manufacturing. America will continue to decline as an economic power if we continue sending so many dollars to China and OPEC.

  23. Booker Rising Says:

    China Worried About U.S. Spending…

    As every American in financial trouble knows, it?s never good when your creditors start asking questions. Today, the United State?s biggest creditor grumbled about our current spending. Alan Stewart Carl, a moderate blogger, writes: “This reminds us…

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