I think the US has become too dependent on Chinese financing to pursue any strategic goals in northeast Asia that run counter to strongly held Chinese interests. If push comes to shove in Korea and we find ourselves in a situation that calls for military action against Pyongyang – say, they “test fire” one or two “satellites” into Japanese waters or even Japan itself – any such action will be firmly curtailed by our new bankers. Our bluff will be called, and Japan and Korea will see that they have to fend for themselves – either by turning supplicant to Beijing, or arming themselves with their own nukes.
Any thoughts? I’ll be happy to be disabused of this notion – please convince me that I’m wrong.
As to NoKo, I think it’s actually the opposite. China counts on the US to be the bad cop to its good cop. They don’t want that lunatic to be able to fire missiles indiscriminately.
As far as the Suez comparison goes, I think the US back then was in a better position to dump sterling than the Chinese now are to dump T-bills. The US back then could afford to take a loss by dumping the pound at fire-sale prices; China is too heavily invested in the dollar, and its internal finances are too precarious, for it to be able to deliberately drive down the dollar by dumping T-bills.
Of our debt, about $7 trillion has been sold by bonds to the general public, including China. Without looking it up, how much US debt do you think China owns?
I would also say that the US position in world economic affairs was unique in the post-WW2 period. If the US dumped assets, who was there to buy them? Everyone else (for the most part) was either bombed to hell or poor. IIRC, shortly after the war, US GDP was around half of the world’s GDP.
Enough to seriously affect the stability of the dollar. They have already used that threat in the past so it is not like it is something new.
Which makes the policy most effective. If there was huge demand for a currency then dumping it would affect it much less than if there is little demand. If there is little demand you can dump just a small amount and make it come crashing down. It is supply and demand.
There might be a grain of truth to that but it is not necessarily absolutely true. Situations change. If Chinese-American relations continue to be generally good then obviously there is nothing to fear. But the situation could come where they clash. Suppose China makes the huge mistake of taking military action in Taiwan. What would America do? After the Iraq and Afghan fiascos I doubt America is eager to rush in to defend Taiwan militarily. And, in case there was still any doubt, the Chinese could treaten to dump T-bills and ensure America would stay aside and not intervene. As I said, they have used this threat already in negotiations where America was putting more pressure than China was willing to bear. Do you think they were bluffing? If so why didn’t America just laugh at them? Do you think those threats were empty?
I don’t think so. China’s economy is still growing at a healthy rate and, in fact, western countries are counting on the Chinese economy to pull the world’s economy out of the dumps. Of course China prefers not to lose value but America also preferred not to lose their Sterling. But the fact is that at certain moments it makes sense to pay a price. And china might think, “would I pay X billion to keep America from fighting against me? Sure I would!”
I think it is folly to believe the USA can become so indebted and not be subject to any outside pressure.
But I’m really curious how much you think that is. Do you think China owns 60% of our debt? 30%? 5%? For as many times as we’ve had this discussion, the answer generally seems to be, “I don’t know, but everyone’s talking about it so it must be a LOT!”
Which I believe is my point. If someone were to sell dollar assets at a discount, do you not think that they would be bought up by other investors in moments, indicating a high demand for nearly free money? That would probably not have been as much the case with pounds in 1956.
I don’t think the two situations are the same. China may be the main purchaser of American debt but that’s just because it suits that country to be so. There’s nothing stopping other countries from buying American debt if China decided to drop out of the treasury bond market.
So as long as it’s a political confrontation between China and the United States, it’s a minor threat. The only way it becomes a serious threat is if China decides to stop buying treasury bonds for non-political reasons.
The number has been given before and it is not huge in absolute termsbut it is enough to seriously affect the market. An increase or decrease of only 10% in the gasoline market affects the price of gasoline a lot.
A cite for what? for your beliefs? You state that the pound was not desirable then and that the dollar is desiarable now. The dollar has lost about 50% of its value against the Euro in the last few years. It has been losing, not gaining value, And that is with China buying debt. Over the long term the dollar is already falling. Are you seriously saying that if China were to dump debt on the market it would have no effect?
Now let me ask you this. If you had a big chunk of Microsoft in your retirement portfolio, and woke up this morning to hear the news that Bill Gates was dumping his Microsoft holdings to the tune of 10% of the company’s market cap, what would you tell yourself? “Oh, cheerio, pip pip, somebody out there’s bound to buy it!”
Or, alternately, would you get your broker on the phone and exclaim “HOLY SHIT! SELL! SELL! SELL!” ? Further, wouldn’t almost everybody else in the market be thinking the exact same thing? What would happen to Microsoft’s market value, and by extension its cost of capital, then?
China doesn’t need to hold all of the ~50% of our debt held by foreigners. It just needs to create the impression among the other 40% that tomorrow their holdings of Treasurys will be significantly devalued.
Suez rang the curtain down for the UK as a world power. After Suez, the British began a major retreat from their east of Suez bases. The same thing is happening to the USA-we are overextended in two foolish wars, which cannot be brought to a good conclusion. As for the China situation: the US has allowed its industres to be destroyed by China, and this outcome is to be expected. The USA is overextended and the economy is cracking, as we support fleets in Asia, the Med, and the Indian Oceans. We simply cannot afford to be the world policeman anymore, and I think if Obama is wise, we ought to start removing our troops from the worldwide bases. It is time we started taking care of America.
The problem with envisioning a Chinese action in the context of the stimulus situation is that if China were to bring down the U.S. economy, it would harm itself just about as much. If the U.S. goes into a 1930s style depression, Europe and Asia are going to follow us (or lead us) down the hole. If that did not doom China in itrself, leaving it the only solvent nation in the world, then China would have to invest ina Marshall-plan-like stimulus package, just as the U.S. needed to do following WWII. The U.S. had to invest in the economies of Europe (primarily) in order to create enough outside business to keep us going. China would be forced to do the same.
Now, China would be in a position to put lots of strings on the loans, but it would still need to make the investments.
Once the current financial crisis has past, China might consider using all that leverage for its own ends, but it cannot set out to destroy the U.S. economy until the rest of the world is strong enough that China could ignore our disintegration.
I gotta go to bed, so apologies for the quick drive-by in response, for now: but consider the crude analogy of somebody holding you literally by the balls. You will find that person very persuasive even if you don’t believe that he intends to rip your testicles totally off of your body. No, all he has to do is squeeze just this much. Likewise, I’d guess that Washington doesn’t have to believe that China intends to totally wreck the US economy – just dump enough Treasurys to devalue the dollar by this much, and jack up interest rates at home this much.
This is not an all or nothing proposition and it is silly to look at it that way. Of course Eisenhower did not threaten to destroy the UK’s economy and lay ruin to the country. That is just silly. Why would China need to threaten to destroy America and the world? If your neighbor asks you not to park right in front of his house and he could call the county about the junked car on your front yard then maybe you decide to not park there rather than start thinking if you have enough guns to take him on.
China has already used the threat of dumping US securities during negotiations where the Americans were pushing China to revalue the RMB. The American negotiators were threatening with some kind of trade sanctions and the Chinese pretty much said “in that case we might consider some action of our own, like selling American securities”. It seemed to work.
So proposing that China using its leverage is akin to a declaration of economic all out war is just silly.
About seven percent. People looking to promote paranoia about treasury bonds often point to the statistic of what percentage of foreign ownership is held in China (about twenty-four percent). Which is a misleading statistic because the majority of treasury bonds (seventy-two percent) are owned domestically. China wouldn’t have a majority of our debt if it owned every foreign owned treasury bond.
As I said above, it would depend on the reason. If Gates sold his stock because he thought the next version of Windows was going to suck worse than Vista than I’d agree it’s time to dump Microsoft stock. But if he was selling his stock because he was divorcing Melinda and needed a lot of cash to get her to sign a settlement, then I’d figure his situation had nothing to do with anyone else.
If China stops buying treasury bonds for obviously political reasons like trying to blackmail the United States out of East Asia then other countries are not going to regard this as an economic situation. They won’t see any need to follow China’s lead. Some, like Japan, South Korea, and Taiwan, might even decide to buy treasury bonds for political reasons to counteract the Chinese threat (and these three countries already own as many treasury bonds as China does).
I wonder if the Chinese economy itself is a lot shakier than we realize right now: everything is moving so fast that it’s hard to tell, but the world-wide collapse in the price of oil is, to me, a terrible symptom (and yes, I know speculation also played a meaningful role in that) that suggests a tremendous collapse in demand–and I wonder if a lot of that collapse is in China where it is hard to see.
What’s hard to see? The Chinese economy is still growing in spite of the slowdown in exports to the USA.
It seems all empires end the same way: by overextending themselves, getting into debt to maintain a position they can no longer afford and not recognizing the obvious signs.
Spain in the 18th century was still ostensibly a military superpower and the Spanish people still thought and wrote that way but anyone who analyzed the finances of the country could see things were crumbling. Which is probably why people did not want to think about the finances and would rather focus on their glorious military.
Today we see the same thing in America. The glorification of war and war heroes and let us not focus on things which we’d rather not think about.
For years I’ve been reading how China was about to collapse any moment now, how the European Union was bound to be a failure, how the Euro was going to sink like a stone, how none of it all mattered to America which was and would always be the #1 superpower, unrivaled.
The fact is that America’s share of the world’s economy has been steadily shrinking since WWII and there is no way around that. And America has a huge military spending which it cannot afford and for which it is becoming indebted. Look at all other world powers in history and see where this took them.
But, of course, America and Americans will continue to prefer to believe nobody can challenge the USA in any way shape or form and the USA will always be #1 in everything. America is living a delusion and only when reality hits will it face it. Like someone with creedit cards maxed out and juggling balances and saying “so far so good”.
An increase in supply of any commodity with a steady demand will result in falling price no matter the reason for the increase in supply. No way around it.
Other countries might or might not decide it is in their favor to support the USA and they may or may not be in a position to do it… This is not a given and, in any case, the USA would then be indebted to these other countries for the favor. Do you think countries would give something for nothing? The fact is that the USA by having foreign-owned treasury debt loses financial independence. There is no way around it and anything else is just trying to rationalize living beyond your means.
The theory that a certain disaster is too big to happen because no one would allow it is silly. A year ago nobody believe the present collapse of the economy was possible and yet here we are. And no situation is so bad that it cannot get worse.
It won’t always be true but we’re talking about the present not the future. And here in the present, the United States is still number one overall by any reasonable objective measure. If there were to be a head-to-head confrontation between China and the United States, both sides would be damaged but China would end up the loser.
That said, China’s is currently growing at a faster rate than America’s. If those trends continue, China will at some point pass the United States. When that happens, China may decide it’s in its interests to establish this by challenging the United States directly. But for now, I think the Chinese leadership is too smart to fall for the temptation of trying to win an unlikely near-term victory when the odds favor them to win a long-term victory.
I think it’s unlikely that the Pacific Rim nations are going to decide that moving from an established American sphere-of-influence into an unknown Chinese one will be to their benefit. I don’t think many other nations want to see it happen either even if they’re not directly involved.
The Pax Americana, for all its faults, hasn’t been all that bad for the other nations of the world. A Pax Sinica might theoretically be better but it’s an unknown quantity. People and governments are going to prefer to stick with stability as long as they have a choice.
And as I’ve pointed out, the United States doesn’t have a foreign-owned treasury debt. Americans own over ten times as many treasury bonds as Chinese do. China is still the tail not the dog on this.
That’s not the point. It is silly to make everything into an all-out confrontation. The question is whether the amount of foreign debt gives the countries holding it leverage over the USA and the answer is yes. To say “yes, but we coulod kill them all” is just silly. The fact is that it does give those countries, including China, leverage. The fact is that American financial predominance is decreasing and China’s is incresing. Of course the American economy is still bigger but that i snot the point. The point is that the trend is in favor of China. And that already China has some leverage over the USA and that leverage is growing. That’s the point.
Again, this is not an all-out war. I get tired of these silly scenarios. The fact is that that America negotiates with China over many issues and China has more leverage in these negotiations than it would have if it held no American debt. Denying that is just silly and turning it into WWIII is just as silly.
I suppose my neighbor across the street has an arsenal enough to kill the entire street but that does not mean he’s going to do it if I ask him not to park in front of my driveway.
America continuously negotiates all sorts of things with many countries and the fact is that it does not have the position of power it had 50 years ago and that its position is gradually eroding. There is just no question that America would be better off if China did not hold the amount of American debt which it does hold.
Trying to turn this into WWIII is just plain silly even if Americans like to think every problem has a military solution.