Our last rumination on why the Chinese are content to earn such a low rate of interest when buying most of our enormous federal debt brought forth many responses, some curt, some erudite and all enlightening.
The following came from a certain gentleperson (so as to not give away their gender) who has worked at the highest levels of our citizen-run democratic republic and served on many business boards and international commissions…let’s call this person ‘Alex Hamilton’ for confidentiality’s sake:
‘As you know, many high-level business deals among men occur in two sacred places: the golf course and the men’s restroom.
I feel sure that if ever a U.S. Treasury Secretary confronted a Minister of Finance for China in the men's room away from the negotiating table with a complaint about the artificially low and manipulated official yuan exchange ratio to the US dollar, the Chinese Minister would probably say, "Screw you, Mr. Treasury Secretary-of-what-used-to-be-the-most-powerful-nation-on-earth!
Why do you think we enjoy an enormous trade surplus with the United States in the first place? Because the American desire to have everything they want at low prices has allowed us to put you over a barrel. We sell Chinese stuff like cheap underwear to the US at a 30% discount to real market costs. We have imposed a premium price of 130% through tariffs on imported US goods. And there is nothing you can do about either as long as your people keep buying our cheaper stuff so we gotcha there as well, Mr. Secretary!
The fact is we accept 'below normal' rates of interest income on U.S. Treasuries because it is a fraction of the dollar trade advantage we enjoy with your country nowadays. It is more than worth it to us on a cost/benefit analysis.
So what if we 'lose' $50 billion per year in lost interest income from you guys? Last year, 2008, we exported over $338 Billion worth of goods to US consumers alone. Just our exports to the US in 2008 represents the 28th largest entity in the world if ranked by GDP...ahead of the entire GDP of Argentina and not far behind both of the GDPs of the oil-exporting nations of Saudi Arabia and Iran!
Not to mention the enormous benefit of having a robust economy and generating jobs for our peasants at about 100,000 new jobs per week and funds for our capital investments. (sotto voce….And if we don’t keep the peasants busy, 1 billion of them will come rushing the Capital City of Beijing and cut our heads off so we have GOT to ‘keep those rags and machines humming’*)
We don't buy your Treasuries, Mr. Secretary, as a sound financial investment. It's just ‘payola’ or ‘baksheesh’ to keep your economy open to our products.”
One other investment advisor informed us that there is a relatively new bond the US offers that offers inflation-protection against the loss of any asset value called TIPS (Treasury Inflation-Protected Security). TIPS adjust the principal of the bond to the CPI so the interest payments increase to offset the negative effects of inflation. The Chinese government basically demanded them as a pre-condition for future bond purchases.
So while the stated interest rate stays the same, TIPS offer a much higher return in actual effect plus protection against inflation's deteriorating effect on bond value. Good for the lender; not so good for the borrower…i.e. starring you, as the American taxpayer…once again.
So much for the standard laws of economics as put out by Adam Smith and all the other classical liberal economists of the Enlightenment put forth. ‘Heads you win; tails, the American taxpayer loses’ should become the new national slogan that printed on every U.S. dollar bill and bond issued from now on.
Between the need for preventing a billion-person Revolution in China, (pretty hard to imagine 1 billion angry people since during our Revolution of 1776-1781, almost as long as our current occupation in Iraq and Afghanistan, we never had more than maybe 17,000 American militia in the field fighting the dreaded Redcoats) and the adroit way the Chinese government has forced the US to issue things like TIPS to protect their investment in our debt, it looks like the Chinese are going to be in the driver’s seat for a long, long time when it comes to influencing American policies.
And as long as President Obama, the Democrat-controlled Congress (for the next year anyway) and the GOP probably after that, continue to spend recklessly unlike any government since the latter days of the Roman Empire, we are always going to be under some influence of our symbiotic relationship with the Chinese like some lichen on a tree.
Choose your own bad analogy if you wish…lichen, fungus on a host, cancer…they all apply.
picture courtesy of www.nysportsjournalism.com
* song lyrics courtesy of Rose Royce, 'Car Wash'