Why Is China Concerned About U.S. Debt Talks?
Things have degenerated to the point that communist China publicly called on the United States to raise its debt limit ceiling to protect its foreign investors last Wednesday:
“China Urges U.S. to Protect Creditors by Raising Debt”
– New York Times, 7/15/2011
White House and Congressional bickering is making foreign governments increasingly uneasy about a possible U.S. federal government default on its debts.
It is not the first time China has expressed this concern. Last April China did the same thing. Back then China was ridiculed in the U.S. press for lecturing us about finances.
Why should we care what China thinks?
It’s an important question.
Its important because it speaks directly to those conservatives and liberals who believe that there will be no serious consequences if we don’t make a debt deal soon.
Let’s take a look to see why Chinese concerns prove them wrong…
Why Is China Worried?
If you think China is just playing one-upmanship by lecturing us silly capitalists about being fiscally responsible, you’d be wrong!
China is only watching out for its own bottom line, pure and simple.
China’s announcement Wednesday came immediately after Moody’s warned it might cut the federal government’s credit rating because of a “rising possibility” that no debt ceiling deal would be reached before Aug. 2. Standard & Poor’s announced for the 2nd time that it was considering lowering the government’s credit rating.
Last April, China expressed the same concern on the heals of Standard & Poor’s first announcement that it put the federal government on its bad credit watch list.
Should the government’s credit rating be lowered it would devalue the worth of $1.1 trillion in U.S. treasury securities owned by the Chinese government.
That is what the Chinese are worried about.
The Group of 11 Stand To Lose, Too!
China is just verbalizing what other governments are thinking.
Check these numbers:
“Major Foreign Holders of Treasury Securities – 2010-2011” – U. S. Treasury Department, 7/15/2011
As of April 2011 foreign governments own $4.5 trillion in U. S. debt. That is up almost 14% in just one year.
The top 11 largest foreign debt holders in order, as defined by the Treasury, are:
China, Japan, England, Oil Exporting Countries, Brazil, All Others, Taiwan, Caribbean Banks, Russia, Hong Kong and Switzerland
Those 11 are the big stake holders. They own 82% of total foreign holdings.
Not only are foreign governments getting more vested in actual U.S. debt, but have reason to worry about the rest of the U.S. debt as well.
The National Debt – Who Owes Who What?
According to the Treasury Department the “Debt to the Penny and Who Holds It” for our national debt is, as of today, $14.34 trillion.
The national debt has two major debt reporting categories:
“Intragovernmental Holdings” is just a fancy way of describing money that government borrowed from itself and spent! That includes every penny out of the Social Security and Medicare trust funds.
“Debt Held By The Public” is U.S. debt held outside government purchased by citizens, financial institutions and foreign governments in the form of interest bearing treasury securities.
Thus, after subtracting out intragovernmental holdings, foreign governments hold almost half of all U.S. public debt not owed by the government to itself.
As the debt position of the U.S. government worsens, its effect is magnified because so much of the total debt is tied up in money government has borrowed from itself.
The equivalent would be like you and I taking out a new credit card and then using that credit card to pay on another credit card’s outstanding balance. That only leads to disaster.
But that is the position our federal government finds itself today.
The Inevitable Endgame
Our debt crisis is real. The Chinese know that; they are our biggest creditor.
But China only holds about 25% of all foreign held U.S. government debt. Japan isn’t far behind. China is speaking out, but they only verbalize the concerns of the group of 11 who have now got themselves mired in the United States government’s spending and debt crisis.
The situation is particularly fragile because so much of U. S. debt is owed by the government to itself, which further weakens our fiscal solvency.
The real damage is done if the government’s credit rating goes down.
Standard & Poor’s and now Moody’s tell us that WILL happen if a deal is not reached.
If the U.S. credit rating is reduce, foreign countries stand to lose money on their $4.5 trillion investment in our government’s treasury securities. That is why China and the others are worried. Under those conditions they will be less likely to invest in treasury securities in the future and put their money elsewhere instead.
And in case you haven’t been paying close attention the rest of the world isn’t doing so hot themselves and can ill afford to lose money betting on the “good faith and credit” of the United States.
If our credit rating goes down then it will become more expensive for our government to continue borrowing the $4 billion+ each day essential just to keep up with day-to-day operations.
We inevitably MUST raise the debt ceiling in the near term to keep functioning. There is no choice.
However, should government’s credit rating be reduced then the higher price tag for borrowing would then suck us inexorably into a Greek-like debt black hole.
And what do our politicians do? They argue over a long-term “grand plan” to solve our debt problem with a rosy scenario that avoids reducing government benefits and even includes more “stimulus” spending to recover the sluggish economy.
Mr. Politician… please… wake up and smell the stench!