[China flexing its pimp hand] China to demand guarantees for T-bonds

I agree with SamFisher here. China can try to flex but the reality is that everyone's situation is as bad as (or worse than) the US's. Refusing to lend to the US is basically asking for mutually assured economic destruction. They could try to spend the money internally on their own country, but they would still be destroying the core of their economic export infrastructure and would have to go through their own great depression before they could come out self-sufficient. Perhaps it's a price they are more willing to pay than we are, but still ... this is just posturing. All I hear is "you guys are going to borrow $1 trillion?!?!?! Please be careful...if you screw this up we lose all our foreign reserves!"

We're all in this together, for better or for worse. It's also why I feel Obama needs to be careful about protectionist policies. This is a small world, and that's the reality everyone needs to face.

 

There is no way the dollar will remain as the unofficial currency reserve in the next 5-10 years.

The bad blood and resentment among global partners will only get worse and it's hard for me to see how the government will reduce its debt in the meantime.

 

No, China won't stop buying T-bonds or start dumping them wholesale. That's like dropping the nuclear bomb. It's always better to just remind the other guy that you have the nuclear bomb than to use it. And that's what China is doing here.

But it doesn't mean that there is nothing China can do to hurt the US. Just diversifying a small portion of their reserves or even hinting at it could create panic on the market and drive the cost of US borrowing much higher. Tim Geithner already got a taste of it when he came out with his reckless "China manipulating currency" comment, and that's why you see him backpeddling fast now.

As for what China can do with its reserve other than US treasuries, well there are other currencies (admittedly not too attractive either), gold, strategic commodities such as oil, etc. China could also invest part of it domestically now that inflationery pressures have evaporated. The World Bank's chief economist has just come out with an interesting idea, a new Marshall Plan for the Third World. He is calling for all the rich countries of world as well as countries flush with cash such as China to join in. I doubt the US would be interested right now, but I think China might. It would buy her influence and strategic footholds all over the world. It's worth noting that this guy was a former Chinese government economist.

Anyway, the lesson is, if you have cash, you can always find productive ways of spending it. Any complacency about "they have no other options but to buy from us" is stupid. The current US model of consuming too much but not producing enough is simply unsustainable.

 

Reducing the debt is easy if everyone agrees to it, but the problem is no one agrees to cut the programs they like. Not the Democrats or the Republicans. Would the the Democrats cut medicare or education? Would Republicans cut defense? Is it ok to have 15-20 unemployment or should the government do something about it? There is no easy answer.

 

Ok you didn't get my allusion, so I'll just say it....the people who are buying the yen aren't doing so in the name of people who riot whenever a high-profile person is seen driving a Toyota or a Honda.

Anyway the Yen is overvalued as is, especially for an export-based nation like Japan - why would THEY want it to increase to stratospheric levels? That would be a good way to sink their own ship.

You don't actualy believe China would survive such a default unscathed?

 

The electorate wants easy answers, and politicians lie to their face to keep their jobs....

California has shaken my belief that when fiscal survival is on the line, democracies can agree to cut programs everyone likes but are detrimental to long term interests. It's going to take several kicks in the cultural rump before that happens.

 

Defense is the most logical cut out there, in the short term. Republicans or Democrats will not touch it. Nobody wants to be accused of being soft.

 

I guess they can buy gold but hasn't gold historically been a truly awful long-term investment in the postwar period? and I have a feeling unloading a substantial portion of their dollar reserves into it would make it an even worse investment.

For the record, the whole thing about asking for "guarantee" is kind of silly - it's like "well you legally promised to pay, but we want you to GUARANTEE you will pay" - what is the US going to do, find a co-signor? use Hawaii as collateral? Give it priority in World Bankruptcy Court? There's a reason why the US government is called the lender of last resort - cause it's the last resort. There's no guarantees after that.

 

Comes down to it, USD is not the only currency you can park your money. China surely won't survive a default unscathed, but you also completely blow up your own economy in the process, probably not the best way to go about it.

USD is in demand because its considered relatively stable, i.e. stay away from the slightest hint of a possible default.

 

This is awesome!

I always guarantee my own obligations. First I sign that I promise to pay. Next I sign that I REALLY REALLY promise to pay.

 

I don’t think you want to be cutting spending to reduced debt at this point. You want to be increasing productivity and paying down the debt with increased tax revenues. Just like any business you often have to invest money to make money, and now is the time to be investing in retooling and retraining, not cutting back.

On China, I haven’t heard any specifics, but they certainly should be increasing their internal spending. They’ve been growing at an incredible rate for many years now and as a result they have huge infrastructure issues and huge environmental issues. This down turn in the economy is the perfect time for them to redirect some resources and start catching up on some of these very large internal issues.

 

Not saying cutting debt at this moment but it has to be done sooner or later.

 

If you want me to take a dump in a box and mark it guaranteed, I will. I've got spare time.

 

Agreed.

 

Or the fact that old people vote. Thus you cannot cut any medicare.

 

The only way you can cut big programs is across the board cut say like freeze all budgets for 10-20 years when the economy is better.

 

China's US Dollar-denominated holdings are not just in Treasuries, they also include other investments in things like Fannie Mae and Freddie Mac, which has been less than secure to say the least. At the height of that mess, China demanded, and received, daily briefings from US treasury officials, from Henry Paulson on down, on how the crisis is being handled.

Nationalist hoo-hahhh aside, there is little doubt that China has got the US by the short hairs, and we have nobody else to blame but ourselves.

 

Timothy "Tax Cheater" Geithner backpedals, wow.