Uncle Sam, your banker, will see you now

Did Paul Craig Roberts mistakenly omit a comma when he scripted the title to his August 8 article, "Uncle Sam, Your Banker Will See You Now"?

I started wondering about that after I went down to my bank and took out a certificate of deposit.  Upon returning home, I reflected on that transaction.  I'd had a few dollars I'd rather earn interest on instead of stuffing them into a mattress, so I loaned them to the bank.  In return, I got a piece of paper that said the bank would pay me back with interest.  I was the lender, my bank was the borrower.  Everybody was happy. 

Moreover, that transaction was similar to all the times I'd gone down to that same bank over the years and purchased a United States Savings Bond.  Each time, I had a few dollars that I wanted to invest safely, and that Uncle Sam serendipitously wanted to borrow from me—so Uncle Sam traded me a piece of paper that said he'd eventually pay me back with 5% interest.  I was the lender; Uncle Sam was the borrower.  That was perfectly okay with me, because Uncle Sam is the ultimate bank for dollar transactions.  Everybody was happy. 

China, too, has been accumulating a few dollars they'd rather not stuff into a mattress.  China's government is like I am, in one respect: they wanted to invest some of their dollars in a safe, interest-bearing security.  By a fortunate coincidence for China, Uncle Sam wanted to borrow those dollars, too (in addition to mine).  So Uncle Sam traded China some pieces of paper that said he'd be happy to pay 5% interest for the privilege of borrowing those dollars.  China was the lender, Uncle Sam was the borrower.  That was perfectly okay with China, because Uncle Sam is the ultimate bank for dollar transactions.  Everybody was happy. 

Or almost everybody.  A few headline-writers now seem to think China owns us, and can have their way with us whenever they'd like.  Frankly, I don't get it.  Uncle Sam is the bank—i.e., the borrower.  China is the lender, the holder of that bank's certificates of deposit... or, one of the many holders, anyway.  If China, the buyer of Uncle Sam's CDs, now wants to sell them before they mature, they'll either find plenty of buyers at going rates (such as the British), or they'll have to take a loss by selling them at a discount.  That's the financial equivalent of shooting themselves in the foot.  That's why I don't get it.

If I were the lender (and, in fact, I am one of them, because I own several US Savings Bonds), I'd prefer to hold onto Uncle Sam's securities until they mature... then roll them over into new ones.  The rest of the world's lenders in the vast bond market still seem to think Uncle Sam's treasury securities are among the safest financial instruments on the planet; not only is the bond market correct in that assessment, but as long as the US economy remains healthy and growing, those securities will remain safe and secure.  Why would I want to reduce the value of my own treasury securities by dumping them?  And why would China? 

The only logical scenario I can think of for dumping my US securities would be if I saw some kind of ominous threat to the US economy—such as, come to think of it, the threat of a protectionist trade war.  Could that be what the article was hinting at by mentioning "the idiots in Washington"?  Could protectionist American politicians, instead of China, be the biggest threat to our economy, and therefore to the value of dollar-denominated securities that Uncle Sam, the banker, is issuing? 

I must admit, that is a threat; how sadly ironic that it's coming from our own politicians. 

Last week's "favorite quote" by Paul A. Samuelson bears repeating here: 

Protectionism breeds monopoly, crony capitalism, and sloth.  It does not achieve a happy and serene egalitarian society.

Comments

[Aaron]

You shouldn't be "going down to your bank" to buy a CD. You can simply open an account on-line at ING Direct and get a better rate while also saving on those CO2 omissions.

[Steve]

My bank is close, my banker is friendly and pretty, and I'm still way under my carbon budget. (Too bad I can't put carbon in the bank, too.)

There's more to life than ROI.

[Chris]

The problem with this analysis is that it assumes a rational China. I'm not entirely sure this is the case -- a couple of weeks ago, China threatened to sell its holdings to punish the US:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

This may be just saber-rattling, but it may also be a sign that the Chinese, long steeped in communism, don't really understand the economics of the situation.

[Steve]

The Chinese central bankers are very much aware of how the economics work. It also appears they understand psychology as well as economics, because I think their rhetoric was probably a preventive measure intended for protectionist-minded American politicians.

[Patrick]

As a practical point, how could the government even go about preventing the Chinese (or anyone for that matter) from buying US Treasuries? And even if it could be done at auction, how could it possibly be done on the secondary market?

I guess my point is, even if this is a problem, what could be done about it?

[Bob]

Random thoughts. I'm in a rambling, random mood today.

Let me start by opining that Mr. Roberts' article was poorly written and more of an emotional tantrum. Not something I would have expected given his background. He must be hanging around too much with Pat Buchannon.

China. China. China. At some point I sure wish we'd quit thinking small and start thinking big. We get in a tizzy about sweatshirts and underwear when we should spend our energy and intellectual capital coming up with innovative goods and services that 50 cent/hour people can't produce.

If we want to really do something about trade balances why not invent stuff here that creates demand elsewhere?

On protectionism. A lot of this is
tit-for-tat and will be ongoing because that is how humans behave. Silly, really, because South Vietnam can make sweatshirts and underwear, too.

But let's make things a heck of a lot more transparent. We can start by not protecting countries from costs they would normally incur if they were held to the same standards we are.

How about we send Al Gore to China for a year or two? He can tell them they need to spend about $200-300 billion to clean up their environment.

[Counter Revolutionary]

Bob, inventing here is not the problem. Producing it here is what makes the difference. We do invent, but then we license.

Chris, rational China? They are being rational. If it weren't for the fear mongering in our press, would their threat have had any traction? Any traction at all.

Steve, love the analogy. Hope you don't mind if I use it?

[Fat Man]

If you owe the bank a thousand dollars and you cannot pay it back, you have a problem.

If you owe the bank a billion dollars and you cannot pay it back, the bank has a problem.

We owe China almost a dollars.

It is their problem.

Further, if the Chinese behave in a way that we find unacceptable (e.g. attacking Taiwan), we can tell them that they won't get their money back.

They know this, and it will make them think twice before being obnoxious.

Pretty good deal, I'd say.

[Fat Man]

Oops, computer ate my formatting.

"We owe China almost a TRILLION dollars."

[Aaron]

"Bob, inventing here is not the problem. Producing it here is what makes the difference. We do invent, but then we license."

China is great in one sense, that an inventor can have an entire out-sourced factory at his disposal in China, and one that can ramp up production easily, too.

The only problem is that all of the neighboring factories (not to mention the original factory) oftentimes simply start to copy any successful product.

And people want to weaken our patent system.

p.s. Steve, I used ABN/AMRO private banking for a while - free coffee and cookies in a nice environment (and pretty, too)...then I noticed that not only was I getting less interest, I'd spend an hour at the bank since it was so nice.

[Bob]

"The only problem is that all of the neighboring factories (not to mention the original factory) oftentimes simply start to copy any successful product."

Then haul their butts in front of the WTO or some court.

I'd let these guys know that we want to do business with them, it's mutually beneficial. We can play win-win but there are laws out there we expect you to abide by.

Sheesh. No wonder I'm not optimistic about moving this country forward. If it isn't fear of upsetting the Chinese because of their bond holdings, it's getting run over by Sharia law. Pick a problem facing us and you'll find analysis paralysis. And, there's a ton of negative self-fulfilling prophecy out there.

Where's the bold ideas? Where's the vigor and vibrancy? Where have all the leaders gone?

[Kevin]

Savings Bonds? CDs? Whew, you're really a crazy gunslinger when it comes to investing. Maybe you should tone down the Beta a notch.

Anyway what's China going to do? Repo our car? Have a 3rd party debt collector call the Treasury department during dinner?

[Steve]

That's the safe end of the mix. I wish the index funds, puts, calls, and leaps were backed by the full faith and credit of the US government, but they're not.

[mark]

So the Chinese are going to dump their dollar holdings and drive down the value of the dollar. Then they have a few choices to make. Sell their stuff to us for the same dollar cost, but since the value of the dollar is lower they will actually get less return. Or charge more for their stuff which will make in less competative and risk losing business. Or stop selling us stuff and put a lot of their work force back into poverty.
Steve, I think the Chinese rhetoric was intended for protectionist simple-minded politicians or cannot think things through. Any mortgage backed securities in that investment mix (that you know about)?

[Matt]

If you're gonna use ING's high yield savings account, first take a look at etrade's FDIC insured savings account their rate beats ING.

Also, from the inception of the stock market until now, the market has gone up, on average, 11% per year. This includes the great depression years. If you're investing for the long term an index fund is a great choice and will most likely yield much higher than a bond or CD. I also think that Index funds are probably as secure as FDIC insured investments are. I figure if the economy tanks enough for me to lose money from a long term index investment then something like the entire US/world governments/economies have collapsed and I'm not likely to get my FDIC insured money back either...

[Luis Busquets]

I cannot agree more with the blog owner. The USA has got trust. The Chinese are buying just paper with the faces of US presidents and the Chinese believe these papers are worth its value.

If I am the only one who has the machine to create dollards and it is the whole world who pays the consequences of me doing so (inflation) that is fantastic for me. Look at who paid for the Vietnam war or the Apollo Program.

Nevertheless, there is a risk in this position. If who buys you the painted papers looses trust in you, you will be losing your principal asset.