When a government has to publicly start assuring foreign creditors about the soundness of their debt holdings, it is high time to worry:
Some excerpts from Obama Administration Tries to Reassure China on Treasury Debt:
“There’s no safer investment in the world than in the United States,” White House Press Secretary Robert Gibbs said yesterday at a briefing in Washington.
This statement shows the sheer arrogance of policymakers. Even if there was no safer investment in the world than in the US, it is most definitely not with the US government. Why should it be? Why should an organization that does nothing but borrow and spend money, while facing a massive tax shortfall and not creating any factors of production be a “safe” investment? Just because they are currently considered a safe haven and might continue to play this role for quite a little while longer, who seriously believes that this will never come to an end?
White House National Economic Council Director Lawrence Summers, asked yesterday about Wen’s remarks, said overseas “confidence” in Treasuries would be hurt without the administration’s steps to end the economy’s decline.
Yes, and confidence in Treasuries deserves to be hurt. Too much confidence in debtors is what created the credit crisis in the first place, in case anyone still remembers.
“The U.S. Treasury market remains the deepest and most liquid market in the world,” Treasury spokeswoman Heather Wong said in an e-mailed statement. “President Obama is committed to taking the steps necessary to restore growth and put this country on the path of fiscal sustainability, including cutting the long-term deficit in half over the next four years.”
Actually President Obama is doing absolutely nothing to restore growth. Which one of his policies exactly restores growth? Which intelligent and/or competent person would seriously believe and say with a straight face that this government will cut the deficit in half within the next four years, while at the same time passing a budget that dwarfs all previous ones and while facing a massive tax shortfall.
The administration is “tackling many long-ignored problems, ensuring that the U.S. will be in a stronger position than ever,” Wong said. “We are facing whatever challenges come up and will continue to do so.”
The truth is: The government is not tackling any long-ignored problem. It maintains business as usual and it has proven this in the fields of fiscal as well as foreign policy. Wong is simply firing platitudes at the problem, hoping they will stick.
“Of course we are concerned about the safety of our assets,” Wen said after an annual meeting of the legislature. “To be honest, I am a little bit worried.”
You should be.
China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.”
China has no other choice than to stop buying US treasuries and begin ensuring that past obligations will be paid. The US will need to export more and import less while China has to reduce exports to the US and import more. This is the only way the US will ever be able to pay off their debt to China. More on this in The US Current Account Deficit.
U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.”
She actually urged China to keep buying treasuries which are a “safe investment”? If they were such a safe investment then why should Hillary Clinton need to assure them about their safety. Why at the same time would she need to “urge” them to buy more?
The outcome of all this is pre-ordained: The massive current account deficit will be reduced because people in the US consume less. Americans have begun to save more. There is no way this trend will stop anytime soon. China will need to export less and begin investing more domestically, while at the same time importing and buying more goods from or in the US. This will happen, whether the US government likes it or not. The End of Consumerism is in full swing. But the government’s reckless borrowing, spending and bailouts assure that this correction will take a very long time. I don’t think it is unreasonable to assume that it will take until 2020 or so until an approximate trade balance between the US and China is restored.