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The US in hock « Previous | |Next »
March 14, 2009

The economic reality of the global economy is that China is funding the US. China owns around $US 2 trillion of US Treasury bonds. So the world's greatest political power is the world's greatest debtor. The $US 1.7 trillion budget deficit this year (and more deficits) in the following years) will be financed by more debt financed by foreign bondholders.

The US is a super power with $US 1750 billion fiscal deficit and a $US500 billion US current account deficit; a super power with feet of clay. From a Chinese perspective America has gotten into the current trouble from living beyond its means — borrowing to maintain a lifestyle (inflated housing market and maxed-out credit cards) it cannot afford.


At some point the foreign bondholders will act to protect their investments, such as demanding higher rates of return on their investments rather than dumping the Treasury bonds, nor do they want the dollar to plunge since they'd be stuck with a lot of paper worth far less than they got it for. Chinese officials have shown increasing signs of concern that the sharp increase in US government spending will lead eventually to inflation, a collapse in the dollar, and so threaten thge “safety” of China's huge holdings of US government debt.

Reducing the deficit and repaying the bondholders looks difficult, given that US consumers and businesses are in no mood to spend or invest; the financial institutions are severely weakened and hesitant to lend; short-term interest rates are effectively zero, leaving little room for conventional monetary policy; and world demand provides little hope for lifting the US economy. More stimulus packages? Does that mean more borrowing and debt? Probably.

In other words, the US economy is shrinking and angry right-wing populism lurks just below the surface (Obama is leading America into the abyss is the rhetoric of the Republican media attack machine). Yet the reality is that the US is more or less reliant on China and needs to take China's interests into account.

| Posted by Gary Sauer-Thompson at 11:25 AM | | Comments (3)


Andy Xie at The New York Times says that China’s position as the largest creditor is concerned about the dollar’s value and about how well the U.S. is managing the financial crisis.

That means the US must address Chinese concerns.

Great cartoon.

it is isn't it. Moir continues to produce good work