As the article says, China could dump their U.S. debt on the global market.
The tide is turning. While exports to America may still be a very large part of China’s economy, internal demand and exports to other countries are much larger.
But the main point to bear in mind is not that what might be the cost to China is not the overriding factor. In any game what counts is the yield of your cost. If for every $100 you spend your enemy or competitor loses $200 then you are coming out ahead. Furthermore, people and countries are not rational and they often get into races and wars where they will lose even if they win. Just look at the Iraq debacle. It was mostly a matter of Americans wanting to kick some ass for nationalist pride. That’s all it was and is. At a huge price. Look at the sorry state of the American budget and yet America contunies to spend money in Iraq. China has a huge surplus. Why would they be willing to spend it? What do they want the money for if not to spend it when they need it. A,erica is spending money it doesn’t have and you think China would not spend money it does have? What kind of reasoning is that?
The day may come when China and the USA get into a shoving match over any excuse and China will gladly take a big loss in exchange for the damage it will do the USA. Wars, whether military or otherwise, are like that. The point is not to keep all your assets intact. The point is to do more damage to your enemy than they do to you. Under the correct circumstances China would gladly sacrifice some of their assets, human, military, financial, they are no different: tools to be used and sacrificed if need be to defend the country and the state. I find it amusing that some people have no doubt China would have no problem sacrificing hundreds of thousands of soldiers but think China would not want to sacrifice some assets in the form of sheets of paper they have in a vault somewhere.
To say countries will not spend money to fight wars is just silly because history proves otherwise and the USA is a good example of a country with a huge military budget. What makes us think China would not want to do the same? And why would they not tinker with financial markets if it was to their gain? China has already threatened America with that in the past and America backed down from their demands (I forget exactly what they were).
America is not what it used to be in the world. China is not what it used to be. The balance of power is changing and Americans are trying to ignore that at their own peril.
http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=015/llsl015.db&recNum=572
I know the gentleman you’re talking about. Apparently, he was educated in the old Soviet system, as the term does not appear to exist in the actual document.
Well, that second link ends like this:
Let’s try to be a little more optimistic. Things ain’t good, but it’s not time to stock up on firearms and canned goods and look for a cave in the Rockies just yet.
In Soviet Russia, YOU do not exist in actual document.
At a huge loss?
Individuals (and countries) buy debt because they assume they are going to make money on the interest on that debt. If you aren’t losing money on American debt, why dump it? And if you dumpt it, who do you think is going to buy it from you if they think it’s worthless?
In other words who is in worse shape if the debter defaults? The debtor or the sucker who lent him money?
I man what are they going to do? Repo the Washington Monument or something?
So what? Who would buy it from them?
Anyone who wanted to buy US debt. Instead of buying from America they could buy it from China much cheaper. Which in essence means America could not get further financing. Not only could China stop buying US debt but they could prevent America from selling more.
Countries take loses when they feel it is in their interest to do so. They spend huge amounts on armament only to have it destroyed because they feel the gains are worth it. Nobody would have any problem thinking China would spend that money on armament which would be destroyed. Why would they have a problem dumping American debt at a loss if that harmed America and that was in their interest.
I just don’t get it. Why would China be willing to sacrifice lives and millions of dollars in a shooting war but not be willing to sacrifice millions of dollars in an economic war?
Tell me like I’m 6. Why would China dumping it’s US dept be bad? Does dump mean collect all at once? Because I take it to mean sells it to someone else. Say Sealand buys all the US debt from China. What difference does it make if we owe Sealand or China?
edit: nvm old tab and answered 2 posts up.
If China’s selling it on discount seems like we could buy it up cheap and save ourselves some money.
And another thing, and correct me if I am wrong sailor, but you are arguing that China could essentially offer a higher yield than we would on our debt and would essentially choke us because no one would want our debt, correct? But we just saw that people believe so much in our ability to pay back they will buy our debt and get essentially a 0% yield. Surely they could have got better yields than that? So what makes you think they still won’t buy our debt even if China tries to dump what they own?
Individual investors have mostly earnings in mind. Countries have many other considerations. Are you willing to test their resolve? How about some brinkmanship over for instance Taiwan. China tells you that if you sell some specific weapon system to Taiwan, they’re going to dump the US debt. Are you going to test and see who blinks first? After all why risk your financial health for a tiny foreign country? If the debtor defaults they are both in bad shape. So what- Perhaps the Chinese, thinks it’s worth it. The point is you gave the Chinese the ability to do this to you. You knowingly and willingly gave the Chinese this great sword to hang you’re your neck. And for what? Cheap toys made in China and a few more years of living over your means. Already a few weeks ago I read some Chinese politicians argue they should only help the US finance its bail-out packages if the USA lifted its technology trade restrictions with China. So it appears some Chinese politicians are willing to use the debt to win political concessions. Obviously it isn’t official Chinese policy yet. It might be soon enough.
But my guess is the Chinese are going to try to quietly offhand some of all that US debt anyway. Apparently there is some resentment amongst the common Chinese that they should fund your overspending, when they themselves have so much use for the money. Which is why I don’t know whom you think are going to fund your steadily increasing deficits in the coming years.
Generally, people use arms to achieve some kind of tangible results: control of land or people, destruction of someone else’s army, etc. I have a hard time figuring how buying bonds at $1 and selling them for 10 cents produces any advantage to China. Would it cause economic chaos? Sure. But what’s in it for China? It’s like saying that gambling (war) is wasteful, which is true; but then failing to acknowledge the difference between that kind of waste and cashing out your bank account and setting fire to it all (selling bonds at absurd prices).
In addition, this view tends not to take into account how China generally acts in world affairs. While they have consistently sought to be an economic powerhouse, they really haven’t shown much sign of trying to project any significant amount of power into other regions. For example, they have nukes, but not enough to constitute a genuine first-strike capability. They exploit poorer nations for their resources, but they don’t really seem interested in building alliances.
The idea that China would up and decide to be a macroeconomic kamikaze bomber (I know I’m mixing metaphors) and happily decide to destroy their own economy along with ours, when everyone who has studied China for more than a few minutes agrees that economic growth is the only reason that the current regime remains in power, is simply a financial boogeyman. The reality is that the Chinese government will go to extreme lengths to protect their economic growth, as opposed to sacrificing it out of spite simply because they’re irrational, suicidal, Red commie anti-American pinkos.
He says the Euro can’t become an alternative world currency. I don’t see why not. The Euro-zone is, or will soon be, a larger economy. It’s running at a lower deficit and seems generally at this time to be handled better. Already the Euro has gained quite a bit to the dollar. And if the USA decides to inflate their dollar more by printing money en mass, the Euro might come to look mighty attractive.
Some people are overestimating China’s strength. Yes their GDP is huge, so is their population. They have a little way to go before they overtake the US, Western Europe or Japan and South Korea.
Maybe they just choose not to start an aircraft building company because of the huge start up cost. See any Chinese cars on the road? Does anybody see any technology that comes out of China?
Building plastic toys and making cheap clothes doesn’t count. Yes, China has some impressive city skylines but buildings have been made for at least 3000 years. It is not new technology. Hell they buy most of their military equipment from Russia.
They still have a way to go. If they want to dump our T-bills I say go for it.
It doesn’t. People are talking as if the US is some sub-prime mortgage homeowner and China (or whoever) is some bank that could evict us.
The US economy is bigger than the next 4 countries combined (China is 4th). The EU is not a country. It’s a group of countries sharing the same currency and some trade agreements.
Other countries but American debt for the same reason people buy bonds in IBM, GE or WalMart. Because the USA is big, has a long track record of success and is likely to continue not defaulting on it’s debts. And really who cares who ownes that debt as long as we don’t default on it.
Not that endless debt is a good thing. At some point, I have to assume that our credit is going to run out and we just won’t be able to issue any more.
Maybe –
China has plenty to spend on stimulus to keep its economy full steam ahead. If China encouraged domestic consumption and exported less to the U.S., it would help save this sinking ship.
Where would the money come from? This is a circular problem. America is redeeming debt by issuing more debt. It does not have the money to retire debt. By any current holders dumping debt they would prevent America’s ability to issue more debt. In other words and to make it simple, China cannot call in any debt because debt matures when it matures. But China could dump debt into the market and it would have the same effect because, in reality, it is the same thing. Think about it.
Not to pick on you personally but the problem with these threads is that we end up discussing basic concepts which are needed to understand the overall discussion and in the end we just get bogged down in minor things and the thread ends up being a mish-mash of jumbled things at different levels. And any explanations are lost for the next thread which just gets jumbled up the same way. People who have no understanding of how debt is issued and works are expressing opinions on the entire American economy. It just gets frustrating. It is not only on this topic but even in GQ you see people speaking above their level of knowledge and understanding and I find it frustrating. Again, this is not meant as referring to you but on the thread as a whole. After all you are asking a question and there is nothing wrong with that. It is not any individual post but that there are just several levels of discussion going on simultaneously and it just makes the discussion a mess.
It would take several pages to explain in detail how the debt works so it would be impossible to do it in just a post or two. In any case it would make no difference because most people would not read it and would just continue to post what’s on their mind. People want simple solutions to complex problems. The moment it requires some study and understanding people tune off. And that is a great part of the problem with politics: people do not care about spending any time thinking; they want soundbites, simple solutions to complex problems.
Let’s try a simplified example. Imagine corporation X has issued bonds. Imagine they have outstanding bonds of $1000 each maturing one every month for the next 30 years. The first thing to understand is that there is a market for this debt and the effective interest (discount) rate varies with present market conditions and expectations and the original terms of the bond are now irrelevant.
Company X redeems maturing bonds by issuing new bonds but if suddenly, for any reason, there are bonds flooding the market then the effective yield is higher by buying those bonds in the current market. so if current bond holders start selling their bonds at a high discount then the only way for company X to sell bonds is to offer bonds with a higher yield than what is now being offered in the market. In other words, the effective interest rate company X today has to offer today to sell their bonds is directly dependent on the interest rate offered by the market as a whole and, very specially, the interest rate being offered by the secondary market of Company X bonds. This rate will change with general market conditions and with the specific assessment the market makes of the future prospects of company X. If the market, for any reason, deems company X bonds as undesirable, then those bonds would appear cheap on the market and company X would have trouble selling new bonds. It would have to increase the interest rate paid maybe to a point which is prohibitive.
Normally the desirability of company X bonds is set only by general market conditions (in other words by competing financial products) and by the specific economic prospects of company X. But now suppose a few major bondholders decide on other grounds to dump their bonds on the market. Suppose they object to Company X doing business with the government of Parchentina or to their new practice of DNA engineering. They want to be rid of their bonds and will sell them at any price. If the market supplies plenty of buyers that would not significantly affect the market price but if not enough buyers can be found then the price will drop and company X will have a hard time issuing new bonds. In the way the secondary market works it is essentially the same for company X stocks and bonds.
If China were to start selling US debt that would mean prices would drop, effective yields would go up and the USA would have to pay higher interest rates to keep borrowing.
To say that, if push came to shove, China would be willing to lose Z million dollars in military expenses in order to prevail in a dispute with the USA but that it would not be willing to take Z million dollars in financial losses for the same purpose just makes no sense.
Now, we can discuss under what scenarios China would want to engage or to avoid a serious confrontation with the USA. But to say they would not want to lose Z millions in financial interest but would be willing to lose lives and assets for more than that makes no sense.
Again, China has already used the threat of affecting world financial markets in past negotiations with the USA.
One thing is clear though and that is that other country holding American debt is clearly a liability for America. There is just no other way to look at it. Trying to spin that into making it a liability for China makes no sense. We can discuss how large is that liability and that depends greatly on estimations on how the future will develop.
Another thing which is clear is that America’s relative position in the world’s economy is diminishing while China’s is growing. We can discuss how fast these trends will continue or even if they will continue but trying to ignore or spin this is silly. Some people are trying to ignore trends and to not talk about the future.
Saying Europe is not a country makes no sense. So what? It is a like a country in the sense that it has a common currency and economic policy. In the last few days the Dollar has plunged with respect to the Euro. The fact that the Euro is the currency of several countries does not matter. Those countries have delegated their monetary policy and there is only one common economic policy. For the purposes of economic policy the eurozone is in effect a single country. The Euro has in effect been increasing its share as reserve currency and I believe it will continue to grow at the expense of the Dollar.
It is also plain silly to say “the USA could never go bankrupt”. We can talk about likelihoods but it is clearly not an impossibility. These days we are seeing things which would have been considered “impossible” not so long ago. The rise of Bill Gates and the fall of the big three auto manufacturers would have been considered “impossible” just forty years ago. If history teaches us anything is that the most unlikely things do happen and wishful thinking is no obstacle. Thinking “I couldn’t possibly lose my home; it would be terrible” does not prevent it from happening in reality.
All predictions have China’s economy surpassing that of the USA in less than 30 years and I believe that is what is most likely to happen, probably quite sooner than that. America’s economy is already behind that of Europe. I expect China’s will surpass America’s and then Europe’s within our lifetimes and the worst thing we can do is try to ignore it or pretend it is not happening. I think the best way to deal with it is to face it and establish links and mechanisms which will create incentives for common development and peaceful resolution of differences. Trying to hang on to the notion that America needs to be able to impose its will by force is just plain silly. It cannot do it now in Iraq and much less in China and much less in thirty years.
To return to the subject of the OP, I think it is quite clear that the state of the balance sheet of the USA is far from good and the trend is for it to get worse. I expect president Obama will do something to reverse that trend but there is only so much he can do. Serious measures would need to be taken but people will live with delusions of grandeur rather than face reality and cut back. Individuals are like that and countries are like that and the USA is proving to be no exception. If I had to guess I would say that it is more probable that the coming decades will force the USA to adapt forcefully through a numbers of crises, like the one we are going through now, than that the USA will willingly embark in a policy of fiscal responsibility and take serious measures to cut back the deficit and the debt. Very few people are for fiscal responsibility while most people are for total fiscal irresponsibility even if they do not frame it in those terms. And thus empires rise and fall.