Friday, December 4, 2009

Why Don’t the Chinese Just Stick It To Us And Charge 10% Interest to Hold Our National Debt?

If you think about it, the Chinese government, which is holding close to $1 trillion of our national debt and another $1 trillion in dollar reserves, already has us by the throat in terms of dictating what we can or can’t do regarding any more federal spending.

And, in fact, the Chinese government might be the only thing that will finally force Congress and us spendthrift Americans to change our wicked ways and start balancing out budgets once again.

Take a look at this attached article, ‘The Last Great Dollar Crisis’, written for the Wall Street Journal by Joel Harris, a smart young whipper-snapper now graduated from Oxford University whom we knew on Capitol Hill.  (One of the cardinal rules of the jungle on Capitol Hill is to be nice to everyone you meet on your way up, and on your way down, cause they might wind up being the next Secretary of Treasury, like Young Harris might wind up becoming one day)

In it, he argues pretty persuasively that in the late 1970’s, the Carter Administration and Congress didn’t start to take inflation of our currency seriously until Saudi Arabia and the other OPEC nations started to threaten to buy oil in other currencies than the dollar and make investments in other denominations around Europe.  Less demand for the dollar would only exacerbate the falling value of the dollar, hence, American political leaders finally ‘got the message’ and brought in Paul Volcker to clamp down on inflation from the Fed.

Here’s something we think, and fear, the Chinese might do one day to us in the 21st century (don’t we read history anymore and will we ever learn not to be so stupid?):

-Demand a 10% interest coupon on all future US bonds the Chinese buys from the US for all this debt we are projectiling out right now.

As it is, we are probably paying the Chinese 1-2% interest to buy our new bonds.  And they keep doing it!  Why and for what on earth reason could that be a ‘good deal’ for them?

After all, the incipient risk to the Chinese government is that they are holding $2 trillion in dollar reserves and growing mainly because no one else has the reserves to buy such humongous amounts to finance our profligacy.  And if and when inflation rears its ugly head like maybe to 5% or 7% after this recession ends, the value of their US bonds might fall by 10-20% overnight.  Try losing $400 billion in asset value overnight and you won’t like it one bit.

Why do the Chinese not demand a 10% premium to take on any more debt from us?  We might do it to them if the tables were turned and we had very little confidence they were going to shape up and balance their budgets anytime soon.

One main reason we always heard was that the Chinese have ‘more to risk’ than we do in this transaction.  Why?  Because everything we want to buy cheap, and they want to sell, comes from China!  They fear rising protectionism from the US government if they ding us on not buying any more debt.

"Memo to the Chinese leaders:  The American public is not going to rise up in arms if you demand higher interest rates to hold our debt.  They will rise up in arms if Congress clamps down on imports from China and we have to start paying $5 for every pair of undershorts we buy at Wal-Mart instead of a pack of 3 for $3.99!"

As Tip O’Neill once said: “In politics, everything is local.”

And there is nothing more ‘local’ than cheap underwear, we always say.

The point is this:  The Chinese have us over a barrel and they can basically do whatever they want now because we have stupidly opened up ourselves up now to foreign manipulation of our internal policies because they are the holders of our debt. 

Like the old Gospel tune: “He’s got the whole world in His Hands!”…the Chinese have our whole future in their hands.

And nothing would get us out of that dilemma faster than balancing our budgets and paying off our debt obligations to the Chinese government first and foremost.

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