Loose Canons

China Plays Reagan to Our Gorbachev

Beijing has us over a barrel -- until and unless our budget is brought under control. Are GOP hopefuls listening?

By 6.13.11

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Borrowing Chinese money leaves American politicians unsatisfied. Every time they've spent all the Chinese have lent us, thirty minutes later the Democrats wants to borrow more. For Republicans, Chinese lending is a double-edged sword: on one hand, it's a huge weapon in Chinese hands that can be used to force changes to U.S. foreign and domestic policy. On the other, given Chinese leaders' increasingly hostile statements about American fiscal irresponsibility, it's a political tool Republicans can use.

On April 16, the House passed the Paul Ryan budget plan. The Senate Democrats (with the help of their usual RINO accomplices) voted it down. Our national debt limit of $14.3 trillion has been reached and the money will run out on about August 2 unless Congress raises the limit.

We are fast approaching the 800th day since the Senate Dems passed a budget. Negotiations, if the byplay between congressional Republicans and the White House can be called that, have made precisely no progress because Republican demands to make trillions in cuts to the budget as part of a debt limit hike are being stonewalled by the White House and Senate Dems who have proposed budgetary legerdemain rather than real cuts.

In what may be a historic level of irony, it's apparent that President Obama and his congressional mafia family are less fiscally responsible than the Communist Chinese.

In March 2009, when Obama was counting on Chinese lending to finance his $800 billion stimulus package, Chinese Premier Wen Jiabao warned against excessive US federal spending. He said, "Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried." Jiabao added, "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

Substitute "American" for "Chinese" in the last sentence and Wen could have been mistaken for Art Laffer. But Laffer never threatened to stop lending to America if we made arms sales to Taiwan, as China did as recently as 2009.

Last week an adviser to the People's Bank of China warned against a default on U.S. debt, and said that Republicans were "playing with fire" by contemplating even a brief default. And only a few days ago, a top Chinese debt-rating expert warned that U.S. default had already commenced. Meanwhile, Obama wants to borrow more, presumably from China, to help Greece prolong its financial disaster.

China isn't just our lender. It's not a free-market trading partner hoping that a rising economic tide will raise both economies out of the recession. China is an adversary, a 21st century mercantilist nation whose policy is to gain economic strength by manipulating markets. And its role as our reliable lender is aimed at manipulating U.S. economic strength as a means of diminishing our ability to interfere in Beijing's ambitions.

The European mercantilist nations of the 15th-18th centuries sought to increase government holdings of gold and silver as a means of growing economic power. Their main tool was market manipulation -- by tariffs and trade cartels, which were restrictive enough to cause a few wars. But military power was, to them, a secondary means of protecting or obtaining economic power by conquest and colonization.

China has adapted European mercantilism to its own ambitions for hegemony around the Pacific Rim. Under China's strategic policy, economic power and military power are inseparable. For decades, the Chinese trade surplus has funded their hell-for-leather military buildup including their cyberwar campaigns against American and European defense and intelligence networks. When the dollar was strong, they did everything possible to maintain a trade export to bring U.S. dollars into their reserves. The weakening dollar caused them to reduce their trade surplus in May.  

By their modern mercantilism, China has achieved enormous economic power. Were they to significantly reduce or stop buying U.S. debt, the interest rates our government pays would rise in proportion to their cutbacks. Their vehement objections to the Federal Reserve's "quantitative easing" policy -- buying up federal debt to pump money into the credit market, thereby flooding the market with less valuable dollars -- brought China to the brink of that action.

China's opposition to reckless U.S. spending is based only on preserving the value of our $1 trillion debt to them. They don't want to be repaid with less valuable dollars than they lent us. And we're not a national version of Goldman Sachs -- "too big to fail" -- in China's eyes. We are an adversary whose policy can be leveraged with that debt.

China's economy -- as strong as it is -- isn't strong enough to make its leaders think they should cause a U.S. default. But it can do to us what we did to the Soviet Union in the 1980s: make it too costly for us to pursue our national interests.

Unless we reduce federal spending by trillions of dollars over the next few years, China's financial leverage over us will reach a critical stage at the same time that our need to oppose China on several fronts becomes acute.

China is Iran's closest ally and trading partner. It has built a major presence in oil-rich African nations and in Venezuela. North Korea is effectively a Chinese satellite state. China's ambitions -- turned to India, Japan, Taiwan and Malaysia -- will bring it into confrontation with us economically and, possibly, militarily. What would happen if some future US president went head-to-head with the ayatollahs or Chavez or Kim Jong-il?

If China were to stop lending to us, or even cut back on lending at a critical moment, the interest costs we pay will rise, perhaps massively. We will be faced with an economic-political crisis like Gorbachev faced in the late 1980s. Our national policy can be turned around by that sort of economic warfare. It's a point that Republicans -- especially the presidential wannabes -- should be making daily in arguing for spending reductions now.

None of the leading (God help us) Republican presidential aspirants -- Romney, Palin, and Giuliani according to the latest RealClearPolitics poll roundup -- have made any serious effort to chart a path out of our financial crisis. Which may be because neither Palin nor Rudy are yet running and the former CEO of Massachusetts, as the Wall Street Journal said, would be better as a running mate for Obama than his opponent. Only Tim Pawlenty has taken a shot at it, and done reasonably well.

(Read my lips: no Newt axes in this column. The man is chopping at himself so effectively I need not hack away at him further.)

Tonight, in the CNN debate, many of the presidential candidates in waiting will be asked to address how they'd fix the economy. Newt will have a long and indecipherable answer. Pawlenty will talk about getting us to 5% growth. But none of them will mention the problem China poses. Every one of them should, because China will be one of the biggest obstacles to economic recovery the next president has to deal with.

The only way to reverse the growth of China's power over us is to take a machete to the national budget. Paul Ryan knows this. So do Michele Bachmann and Tim Pawlenty. Over to you, folks.

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About the Author
Jed Babbin served as a Deputy Undersecretary of Defense under George H.W. Bush. He is the author of several bestselling books including Inside the Asylum and In the Words of Our Enemies. You can follow him on Twitter @jedbabbin.