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The Chinese, who hold a humongous chunk of the U.S. government’s national debt, are getting nervous about America’s economic prospects -and they’re right to be jittery- so they’re demanding security.
“We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries,” the Wall Street Journal quotes Premier Wen Jiabao saying.
The premier called on the U.S. to “maintain its credibility, honor its commitments and guarantee the security of Chinese assets.”
Short of registering a lien against the whole country, it’s unclear what kind of security the U.S. could give the People’s Republic that would satisfy our new Communist overlords. But when the full faith and credit of the U.S. government, whose natural triple-A bonds (called “Treasurys”) are used as the credit rating benchmark throughout the world, is beginning to be doubted by bondholders you just know that America is beginning to get the change President Obama promised - GOOD AND HARD.
Then there’s the separate issue of what would happen if foreign central banks like China’s were to stop buying U.S. Treasurys, whose proceeds Uncle Sam uses to fund operations.
It’s worth noting here that Secretary of State Hillary Clinton’s trip to China last month during which she pleaded with the Chinese to keep buying our debt didn’t go over so well. (“By continuing to support American Treasury instruments the Chinese are recognising our interconnection. We are truly going to rise or fall together,” Mrs. Clinton said.)
There are at least two ways to look at the prospect of the Chinese balking at buying more Treasurys.
If you’re a statist who loves ambitious government programs, the sky is falling, but if you believe in limited government, you might optimistically argue that it’s an opportunity to force the U.S. to rein in spending.
Not so fast.
Given the current composition of Congress and the Obama administration’s determination to drive the economy into the ground FDR-style with unprecedented levels of federal spending, the inability of the government to find buyers for its debt would lead to catastrophe. Such a situation, as Philip Klein notes, “will eventually force the Federal Reserve to inflate our way out of the mess by printing money to buy up the Treasury bills that nobody wants.”
Either way, America is screwed.
Maybe we could just give them California and call it even.