Obama to China – give us money!

I mentioned this a couple of times before, here, and here, but it’s escalated a bit this week.  Bloomberg (and a bunch of other places) has a story on it today.  According to Bloomberg, The US is pretty much reduced to pleading with China to keep us afloat.

“There’s no safer investment in the world than in the United States,” White House Press Secretary Robert Gibbs said yesterday at a briefing in Washington.

Gibbs was responding to comments from Wen that China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” Wen said at a press briefing in Beijing.

“Of course we are concerned about the safety of our assets,” Wen said after an annual meeting of the legislature. “To be honest, I am a little bit worried.”

China is right to be worried.  And Obama is right to be worried that China won’t keep giving us their money.  The US will have to resort to printing even more money if China won’t loan it to us.

President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of U.S. debt sales to fund a $787 billion stimulus package and a deficit this year forecast to reach $1.5 trillion. Investors abroad own almost half of all U.S. debt outstanding, and China last year overtook Japan as the biggest foreign buyer.

The US seems to be counting on this: “China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp.

But look at it from the Chinese point of view – why should they throw good money after bad?  To them, the US is becoming a bad investment, and at some point every investor has to cut their losses and salvage whatever they can from a bad investment.  Think Bear Stearns and Lehman Brothers.  Or Citi and Bank of America.  Or AIG or GM.  The list is long.

I doubt that the Chinese will simply dump their current holdings, but what if they simply stop buying more bonds?  Without their deep pockets buying up the US debt (loaning us money) the price of treasuries will drop, causing interest rates to surge.  Which only increases the need to borrow more money simply to pay the increased interest on the debt.

The US effectively has an “option ARM” from the Chinese right now.  We’re not making enough to pay the interest – much less reduce the principal.  So the amount we owe goes up every day.  When it becomes clear that we’ll never pay that debt, the Chinese will stop making our interest payments.  When that day comes – and it will come someday –  look out, inflation will soar.

Buy gold.  I don’t see anything else that will protect you from hyper inflation.  Maybe the Yaun.  🙂

gk

Share

3 Responses

  1. China should be worried about their dangerous over investment in US Treasury obligations. Washington ’s long-term choice is either repudiation or monetization. For monetization to be effective, the depreciation in the dollar would have to be substantial and this in turn would dramatically raise prices of imports for American consumers which would mean a tremendous drop in foreign imports. Debt monetization would cause more disruption to exporting nations than selective repudiation of Treasury debt.

    Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasury bonds, the dollar, gold and the stock market.

    The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts
    Thanks,
    Ron Holland

  2. I disagree. A repudiation of the US debt – even a partial repudiation – will immediately cause interest rates to soar and the dollar to inflate. There are only 3 options:
    1) Default (repudiate) on our debt.
    2) Inflation so the debt can be paid back with cheaper dollars
    3) Spend less than what we make, balance the budget, and start paying it off.

    Option 3 is hard. Many Americans spent more than they made and are now having to cut expenses to pay down their debt, and the US needs to do the same. That will solve the problem and not create another (in my mind worse) problem.

    gk

  3. When we look at the economies, US, Europe are all spending economies. We always say that we are all good, have lots of money. Everyone from the schools to television to even movies have been stressing spending today. I think as an economy we need to focus on the concept of savings. If you study the Asian economies, most of them save half of their income as a habit. Atleast spending only how much you earn is a big step for us. Get rid of your credit card and spend only how much you can earn. That is a first step towards getting the economy into shape.

%d bloggers like this: