Hillary’s Dangerous Threat to the US Economy

Should we block foreigners from investing their dollars in US Treasury securities?  Wait a minute, let’s think about that a little harder before we decide.  Wouldn’t that undermine those foreigners’ opinion of all those dollars they hold in such high esteem today, and make them more inclined to sell those dollars for other currencies?  Wouldn’t that cause the dollar to fall, inflation to rise, and the economy to tank?  Wouldn’t that precipitate the very thing we do not want to happen? 

Hillary Clinton has confirmed, in no uncertain terms, that one of the most irresponsible things we voters can do is to allow our politicians to do our thinking for us.  Her latest foray into economics—or, more accurately, politics attempting to masquerade as economics—is not only based on a false premise, but proposes a “solution” that is a dangerous threat to the US economy.  All of this presumably in the name of pandering to her left-wing base.  Is nothing sacred?

Hillary has set up the false, straw man economic “threat”—that foreign governments, especially China, have invested too many dollars in US Treasury securities.  To defeat that straw man, she is proposing that we take appropriate action to “ensure foreign governments don't own too much of our public debt."

There is so much that’s wrong with Hillary’s dangerous political rhetoric I hardly know where to begin.  So I’ll just start with the facts that Hillary apparently never checked before committing to her ill-advised political gambit. 

First let’s take the assertion about China’s supposed stranglehold on us, from the same MSNBC article:

Tuesday’s nine percent slide in the Shanghai and Shenzhen stock index, which helped set off a plunge in U.S. equity markets Wednesday, gave Clinton a fresh opportunity to argue that America’s economic well-being has become too dependent on what happens in China.

Hillary wrote in a letter to our Treasury Secretary and Federal Reserve Chairman: 

As we have been running trade and budget deficits, they have been buying our debt and in essence becoming our banker.

Oh really?  Let’s see. . . when we check the facts to see just how formidable that supposed dependency on “our banker” is, we find that China owns a whopping 4.0% of our national debt, or 7.1% of our publicly-held debt.  I already posted a pie chart last year showing who owns our national debt, and today I checked the latest numbers (as of December 2006) and turned them into the graphic below.  Click to enlarge:

[Sources:  US Treasury TIC system; TreasuryDirect.]

Sorry, but four percent is not much of a “dependence” on China’s government—our supposed “banker.”  And if Hillary wants to block foreigners from investing their dollars in our Treasury securities, wouldn’t it be wise of her to check with our allies (Japan, the UK, and Canada, for example) to see what they think of her idea of keeping them out? 

Next is the assertion that foreign governments (as opposed to private investors) are the supposedly sinister buyers of US Treasury securities.  Alan Reynolds checked some relatively recent facts on that, too, in an article titled “Doomsday is Doomed”:

On April 26, [2005] The Wall Street Journal reported, "In recent months, private investors have replaced with gusto official institutions as the driver behind foreign flows into Treasuries. ...Treasury data show that private investors accounted for $31.5 billion, or 74 percent, of the $42.5 billion of Treasuries bought by foreigners in February."

In that same article, he also told us about the consequences we must endure when a foreign central bank shuns dollar-denominated assets:

...we already found out what happens when foreign central banks cut back sharply on their purchases of U.S. Treasury securities. The answer is nothing happens -- absolutely nothing. 

Reynolds is correct: The world market for safe, secure US Treasury securities is far too large and too diverse for supposedly scheming foreign central banks to make a difference.  But think about this: even if a foreign government could put a dent in the dollar by selling its T-bonds—wouldn’t that be the financial equivalent of becoming a suicide bomber?  Why would any foreign government do that to itself? 

Hillary’s political gambit not only makes no economic sense, it is dangerous.  As Robert Heinlein said, “Never attribute to malice that which can be adequately explained by stupidity."  I’d soften that a little: Never attribute to trickery that which can be explained by ignorance or laziness. 

However, in Hillary’s case this time, I’m not sure ignorance is the most likely culprit.  Maybe David Geffen had a point.  I wish politicians, on all sides, would stop trying to fool us into thinking they are economists.

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End note:
Lest anyone think this is just a biased diatribe against liberals, I pledge to continue denouncing (as I've done in the past) any so-called conservative politician who comes up with similar self-serving, wrong-headed political ploys -- poorly hidden behind a facade of "economics."

Comments

[Robert Schwartz]

The ancient maxim is: If you owe the bank enough money, you own the bank.

So what if the Chinese own half a T in treasuries? In practical terms that means, if they attack us or one of our allies, some clerk in the basement of NY Fed reaches over and wipes out those securities. I like the idea of them putting up a bond.

[Grodge]

Sen. Clinton is characterized with adjectives such as "Laziness... Ignorance... malice ...and trickery..." Now who would have thought that a "biased diatribe"?

But you give no mention, from the same MSNBC article, of the Republican Presidential candidate who said in typical alarmist fashion:

[China is]“cheating on trade and they’re buying ships, planes and missiles with our money, as well as taking millions of jobs.”

Getting back to Sen. Clinton, you ask at the beginning of your "unbiased diatribe", "Should we block foreigners from investing their dollars in US Treasury securities?"

But Sen. Clinton never said anything about "blocking" anybody from buying anything. Your rhetorical question is disingenuous at best, and "lazy" or "malicious" at worst. Mr. Pot, meet Mr. Kettle.

Sen Clinton's point is more valid than you allow. The percentage increase in the amount of debt carried by a totalitarian, closed market regime, with no floating currency, is alarming. China is not Japan or the EU.

Clinton is calling for more fiscal responsibility as a solution to foreign debt ownership, not any limitation on who owns what. If we are going to borrow money from unstable oligarchies, perhaps we should make sure we're putting the borrowed capital to good use.

[Ben]

I have to agree with Grodge.

You have systematically criticized the three front-runners for the Democratic nomination.

What about Republicans? Are we to believe that McCain, Giuliani, and Romney are advocating expanding and maintaining the deficit? You have criticized the Concord Coalition, but have you criticized any Republican leaders or candidates?

Furthermore, what do you expect? Do you believe that a candidate could get elected being "pro deficit"?

If I am going to keep respecting your opinions, I will need you to take one these actions:

1. Endorse someone, and defend that endorsement. This fake non-partisan pose is belittling to your readers.

2. Criticize all of the candidates that endorse deficit reduction and other plans you oppose. There are enough of them to keep you busy.

3. Do not mention candidates; talk about the issues not the people. This may be a Goldwater moment -- we may have to change the voters before we can change the leaders.

As it is -- claiming to be non-partisan -- you just look petty.

-A reader that respects you...

P. S. Remember: FDR and Reagan both campaigned on deficit reduction. Elections are complicated.

[Tim Shell]

Every dollar the Treasury Department collects from a foreign source is one less dollar it has to collect from American taxpayers.

If we limit how many dollars foreigners can invest in government debt, we would have to make up the difference with additional taxes on Americans.

Deciding who and what gets taxed allows the government to use taxes as a tool to control and regulate the economy.

As Hillary Clinton wants to control and regulate, it is logical she would wish to limit foreign ownership of US debt, as this would create conditions which require doing what she wanted to do all along anyway - impose more taxes on Americans.

[Steve]

Grodge:
Sorry, I should have mentioned the Republican wrongheadedness in that article, too. But the main point is that idea of ensuring that "foreign governments don't own too much of our public debt" is worthy of attack. Whoever favors that idea is worthy of being called on it; I don't care if it's Hillary or anyone on the other side. It's a dangerous idea, but Hillary happens to be the one who floated it first. I'd like to keep that bad idea from becoming policy; one way to do that is to alert people as to which candidate is advocating the bad idea, so far: candidate Hillary. Sorry if that offends you.

Ben:
I guarantee you that nobody will come out as "pro deficit." What I'm looking for is someone who publicly advocates pro-growth strategies. There are a few of those on the Republican side; unfortunately, on the Democrats' side, it's like trying to find a needle in a haystack. Point me to a few Democrats who articulate growth-enhancement policies, please. I'll start giving their ideas some airtime.

And if you think I only criticize lefties for getting it wrong, you missed a few articles. Try these:
http://www.optimist123.com/optimist/2006/05/rep_tancredos_i.html
http://www.optimist123.com/optimist/2006/06/the_social_secu.html
http://www.optimist123.com/optimist/2006/09/correcting_my_p.html
http://www.optimist123.com/optimist/2005/09/pork_schmork_it.html

I do understand human nature: politics always trumps economics. When someone has their mind made up about the politics, any attempt at an economic argument that undermines the politics is fruitless. But I'll be sticking with the economic arguments, in spite of that.

[john]

Steve,

It is getting even better with the private debt. I was looking ,as were you, at the tic data over 2006. foreigners purchased 189.6 bln. of the private debt and we just added 186.2 bln. in 2006. So they purchased the total added private debt of 2006 and even 3.4 bln. of our tab outstanding from 2005. Isn't that great! The American owned private debt to GDP ratio is dropping even faster.

[ilsm]

"Every dollar the Treasury Department collects from a foreign source is one less dollar it has to collect from American taxpayers."

Wrong, the treasury "collects" taxes, as in maybe the Chinese should be paying tariffs.

The treasury sells T Bills which the Chinese buy.

How you go from raising revenues by selling T Bills to China investing in something needs a bit of explanation.

Is a creditor, regardless of size and how many aircraft carriers an investment?

What else could or should China do?

[john]

Hey we finally made it to the $ 5 tln. on march 1th of 2007. That is 5,000,186,307,661.74 of public debt. And the ratio meter is still running backwards. So that is a good thing. $ 5 tln. of good investment. Has someone ever calculated the ROI number for this investment. Because when it is good, it is easier to say that $ 5 tln. is just a number like $13.4 tln. is.

[john]

“our banker” China owns 7.1% of our publicly-held debt. That sounds like not very much. But stay septical and consider this:
China is a new player on the market for buying our public debt. Lets look at the numbers: From jan 2001 till dec 2007 China picked up more than 18 cents for every dollar we added to the public debt. Our biggest banker allie Japan picked up about 21 cents of every dollar. And for the last 2 years they sold about 50 bln. instead of buying. So the “dependence” on China is maybe not much now but it is bigger and bigger every day. Last year all foreigners picked up 100% of all the public debt we added last year. So I think we can say that there is a "dependence" on our "bankers". If you look in the past you maybe do not see it. But if you look around today you can not just close your eyes. If we Americans start saving again and the government keeps the rate of adding public dept on that same pace, I would sleep a lot better!

[Steve]

Even if we balanced the budget (stopped increasing the number of outstanding T-secs), country X's investors could increase their holdings, if they desired, by outbidding others as the debt rolled over. By outbidding them, they'd be keeping the interest rate on the new bonds low. Low interest rates are good for us.

So what's the big problem with foreigners bidding against each other for our bonds?

And are all foreigners equally scary, or are China's investors scarier than the UK's investors?

[Kevin]

Since I'm from Arkansas, I've known Hillary is an idiot for longer the rest of you have even heard of her.

China gives us the money they make. We give them a piece of paper backed by nothing, with no collateral. Who comes out ahead in that deal?

The more of our debt China owns, the more we have them by the balls. I wonder if any presidential candidates have the basic sense to know this?

[ilsm]

Steve,

China ought to use our dollars, in their CA surplus, to buy John Deere stuff.

"And are all foreigners equally scary, or are China's investors scarier than the UK's investors?"

The cities in Holland in the 18th century were great holders of English debt.

They feared crossing them as the English could easily renege.

I am not sure it is the same vis a vis the Asian rim nations.

"Scary" is a term I rarely broach.

"So what's the big problem with foreigners bidding against each other for our bonds?"

Natural consequence of declining debt is interest rate declines without having to print money, i.e. inflate the currency.

The fed makes low interest rates for us. Particularly, from 2002 through 2005.

[ohmy goodness]

A problem with the US education system is that economics should be taught in high school. That is not done, because to really understand the international dynamics of economy, this teaching is usually reserved for post-graduates. As such, relatively few in the population understand, actually do not care, and trust the ‘big boys’ to mind the store. Add to this that most of the guys in DC are lawyers, who had nothing more than a general 101 Economics course while in college, and it is no wonder that a mess ensues.

We found that we trusted Alan Greenspan, but even a living legend had to retire sometime. Most are not aware, but ‘Wild Willie’ that president guy was in fact a Rhodes scholar with a full working knowledge of the tightrope walking required for international economics.

So now we foresee that China will carry a big stick because China has cash, and the USA of course only knows how to deficit spend. Supply and demand, always true.

So in 2005 the legislators decided that China was gaining too much leverage in the in-balance of cash, the clue being that China was buying T-bills at a 'reported' extreme rate at government auction, the ‘trying to own America’ fear, and if someone did not watch out, the USA would lose any and all leverage in the cash is king category. Sure, Japan holds twice as much weight in USA debt as China, but there is a different sort of dynamic. The USA was always able to leverage ‘will’ on the Japanese, ask the Japanese to slow down here and there, even leave certain industries alone in return for open market on others. China on the other hand bellows, ‘Hey you guys defined free enterprise, we just want to become the masters of it and 1.3 billion people trumps all other wild cards!’

So some smuck in Washington arbitrarily decided that for China to be gaining so much leverage, and cash, that the Chinese currency the Yuan, must have an artificial level and that why should it be constantly pegged to the USA dollar as other nations have [those which enjoy most friendly nation status] when China is all out for volume of exchange and will not listen to Foggy Bottom urgings. The powers to be bit like a hungry fish, gave them the stick they needed to show their voters that they knew how to ‘scrap’. Pressure was brought on China to allow the Yuan to float against the dollar, and the Beijing boys said, ‘Well, OK since you have all these economic allies, since China wants to play fair by WTO and treaties, we will allow the Yuan to float.

The currency immediately lost near three percent of its ‘value’ against the almighty dollar and just over a combined total of 6 percent in the last 2 years! A Pyrrhic victory, and the Foggy Bottom guys told their electors ‘We had overcome!’ Hey, guys just what brand of spin-meister and looking out for the public good was that?

What did Foggy Bottom and the media fail to tell you?

1. China will not state it, but a realistic approach would be that China really wouldn’t mind the Yuan free floating until it is par with the Hong Kong dollar. Just makes that whole economic picture become easier to manage, and hopes of having the Hong Kong dollar grow to match the former Yuan rate are next to impossible!
2. It didn’t affect any former investment by China in USA Treasury bills as China bought them with US Dollars anyway.
3. The only real winner was Wal-mart! As an example, if Wal-mart owed China ¼ of the annual revenue, that ‘bill’ had magically been reduced by that same 3% before payment needed to be made.

In true supply and demand, if there was an inflated exchange rate, then China markets should have said, ‘Me bad, trying to take too much profit, will be nice and use dollars as unit of trade and let Chinas own margins shrink by 3%’. What happened in the late summer and fall of 2005? China free market simply said, ‘hey you idiots! Too bad so sad, what you use to pay 1 dollar US for will now cost you 1.03 because we don’t think in dollars, we only think in Yuan [RMB]!’ America groaned and took it.

Then an amazing thing happened in the fall of 2005, that even the media missed in their objective reporting. Treasury bill sale time…China simply submitted a higher bid than normal. If the rest of the world was going to be the USA financial underpinning and ‘buddy’, well by golly the USA is going to have to pay someone for that privilege. China simply did the equivalent of keeping their hands deep in the pockets, and let ‘free market’ conditions prevail. Look at the 2005 T-Bill rates and that last quarter? Oh well, America had to pay more!

That led to a round #2 with the USA economic partners. Go after China, accuse them of ‘dumping’, China are flooding the world in textiles and shoes! Well, Americas’ economic friends tried textiles first. While Beijing was saying, ‘Excuse me, read the WTO treaties that you all signed and we agreed to years ago, quotas on textiles are expiring, and free market says if our enterprises wish to have a 90% market share, they may do so!’ Interestingly, a majority of that new ‘capacity’ for textiles vanished. It wasn’t Beijing influence, it was the industrialist who had placed a majority of that expansion capacity near the southern borders and not knowing how Beijing would react, or stand tall, they simply picked up the factories and moved them to Vietnam, Laos, and India! Same new capacity coming out of Asia, but hey…you can’t yell at China anymore! On the sneaker and shoe issue, China elected to stand tall in the saddle. “Read the WTO treaties, we are allowed”

Yet the economic ‘force’ was again brought to bear with further devalues of the Yuan, another net savings of 3% for Wal-mart on the paying of their current bills, and another claim of Victory in Foggy Bottom!

The net effect is that there is a smoke screen people, one you are not even seeing! The Euro has gained over 20% on the US Dollar in the last few years. Has European productivity and efficiency for value added grown that much? Ah, don’t think so! America glitter of US DOLLARS in international economics is fading and Foggy Bottom does not have a clue on what they did wrong. Where the US DOLLAR was in fact a global trading currency, the US DOLLAR and NOT the Chinese Yuan is being seen as being too vulnerable, and overvalued! China in the writers opinion will begin to start international trade in Euros wherever possible, thus forcing Dollars to tarnish further and Euro to glitter!

China will thus have surplus Euros, may convert them to dollars for future American treasury investment, but will probably use them for European investment as why allow the world banks to take a percentage in the conversion fees?

For 230 years the USA has had a ‘do it our way or we will punch you in the nose’ view towards currency and value. For the first time in history USA did the fiscal ‘punch’ and China just grunted and said, ‘NEXT’ rather than be influenced. That alone should be a strong signal to play nice. As for the overall effect of this economic tug of war on the Chinese people themselves? Just like Americans have learned since going off of the gold standard and starting to issue ‘specie’ [Federal Reserve Notes], as long as your local economy does not need imports, there is no net change on the daily lives of the people! China is in fact enjoying a standard of living growth, as most new China homes even for the lowliest of workers are having three bedrooms and two bathrooms! Scooters are giving way to automobiles at an exponential rate, and internal inflation in China still borders on ‘nil’! While English language is only mandated for junior high school exposure, many local school districts are in fact offering the learning from 2nd and 3rd grade.

WAKE UP AMERICA! Play nice, the stick and bravado are but a twig and rhetoric!

[Steve]

Thanks, but would it be possible for you to summarize your key point(s) in 100 words or less?

[st4rbux]

another thing I don't think anyone has touched on -

all else being equal... every dollar China plugs into T-bills is another dollar they are not spending on building their military. if that's billions of dollars, all the better.

just a thought.

[Aaron]

ohmy goodness,

Walmart buys in US dollars. The risk is all on the Chinese firms.

Chinese profit margins are not high - most of the yuan strength will have to be passed on in higher prices as profits cannot be reduced.

I think you have several things backwards.

[gunthestops]

Well, lets see 2007 will end up with 9.1 trillion dollars of total national debt. Total debt interest will be about 426 billion. 236 billion in treasury payments to the public, and 190 billion in trust fund interest (which is given in the form of an IOU and never paid). Over the next 4 years the the Treasury ---ok, the tax payer--you--will pay out about 1 trillion in interest. Hmmmm is it just me or does that seem like a lot! Well big spenders, run big debts, and make big interest payments---go big boys -go big!!! It's the new Republican moto!