Chinas justified concern on American debt and how we should hope its groundless
Written by The Indian Express
3 min read
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Never before has so much hinged on so large a sum owed by so many. The trillion dollars in US government debt held by the government of the Peoples Republic of China is an extraordinary,unprecedented sum. And its finally taken a central position in discussions about the financial crisis,about what caused it,and about what the worlds response should be. A few days ago,Chinese Prime Minister Wen Jiabao told the annual meeting of mainland Chinas National Peoples Congress that the Chinese leadership was concerned about the safety of our assets by which he meant the financial assets represented by Americas debts to China. He went on to say that to be honest,he was definitely a little worried an admission rare for a Chinese prime minister,especially if honest.
What is that trillion dollars? Whys it so large a sum? Well,its large because the Chinese save. Like so many East Asian economies,consumers in the Chinese economy are prudent and cautious; in a country with insufficient social security,they put money aside. This is something admirable. What it winds up doing,however,is funding American extravagance: because nothing,historically,is considered quite as safe as US and UK government debt,a large proportion of that money from Asia is parked in America. And what does that do? It finances American profligacy credit card debt,easy money,high consumption,low saving.
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But the value of that debt depends,in the end,on Americas fiscal prudence. And the US,which is already fighting two wars,has just elected a president who has ambitious plans and who plans to run a 1.75 trillion deficit this financial year. That puts amazing amounts of pressure on even the trust that the USs stability enjoys. No wonder,thus,that Hillary Clinton,in China over the past fortnight,and Barack Obama,in remarks this Sunday,talked up the value of that debt: he said that the increase in money flows to the US meant that people still recognised the USs stability was an asset. Which wasnt really an answer to Wens concern,of course. And if US debt were to become questionable,rates there would rise,recovery would falter not only in the US,but in China and the rest of the world,too. So,heres how to think of it: America is the worlds overextended bank. It takes your money and invests it. But,even if it does so badly,were it to fall,thered be nobody to bail it out so lets not have any runs on it,please. And if the banks CEOs are talking it up well,whos surprised?
