China loves U.S. debt; never mind the bluster

I enjoy a good laugh, and the New York Times provided one a few days ago in the article titled "China Tells U.S. It Must ‘Cure Its Addiction to Debt’" at this link.

Here's an excerpt:

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.

What's so funny about that is the irony: For many years, China has been selling their goods and services into our market in order to obtain US dollars; they want our dollars, we want their goods and services at bargain prices. Why do they want U.S. dollars? So they can give them back to us in return for U.S. Treasury securities. We get the dollars back, they get Treasury securities. What do we use the dollars for? Among other things, we use them to buy spy satellites and other national security assets to keep better tabs on ... China.

Here's the (ironic) sequence of events in the cycle:

1. China decides that exporting to the USA is how they want to keep many of their workers employed;
2. China's workers make things, then China sells them to us to obtain our dollars;
3. We get the goods and services, China gets non-interest-bearing U.S. dollars that sit in their checking account at the U.S. Federal Reserve;
4. China pays those dollars back to the USA, in return for interest-bearing U.S. Treasury securities that sit in their savings account at the U.S. Federal Reserve;
5. The U.S. Treasury uses a portion of those returned dollars to buy spy satellites, Aegis cruisers, and other national security assets to help us keep tabs on China.

Bottom line: China gets the U.S. Treasury securities they want as a reward for their nineteenth-century mercantilist economic policies, and the USA gets beefed-up capabilities in intelligence-gathering and other military assets, financed at rock-bottom interest rates. Everyone is happy.

How will we ever "pay China back"?

That question is irrelevant. The real question is, Why does China keep refusing to let us "pay them back" no matter how hard we try? Whether or not we "pay China back" is completely under China's control; they can choose to get "paid back" every time any one of their T-securities matures -- but instead of keeping the dollars we try to pay them back with, they choose to exchange those dollars for new T-bonds, T-bills, and T-notes.

The answer is obvious. China doesn't want their U.S. dollars back; they'd rather have U.S. Treasury securities, and it's their choice. Why should they want non-interest bearing dollars instead of interest-bearing T-notes?

As long as China chooses to have an economy based on exports, the US market will be their biggest opportunity for selling their stuff -- and the U.S. dollar will be currency they'll receive for the stuff they sell us. What they buy with those dollars is their choice, and their track record is telling us they prefer to save those dollars by investing in U.S. Treasury securities. If China, all of a sudden, has some kind of problem with U.S. Treasury securities -- why don't they just sit on all those non-interest-bearing U.S. dollars we keep trying to give them?

Doesn't make much sense, does it? Unless, of course, it's simply nationalistic political bluster designed to impress Chinese workers who make things for us instead of for themselves.

==============

End note:
This topic is perennial. See my previous article from two years ago, Poker with China.

Comments

[Daniel Sellers]

"The real question is, Why does China keep refusing to let us "pay them back" no matter how hard we try? Whether or not we "pay China back" is completely under China's control; they can choose to get "paid back" every time any one of their T-securities matures -- but instead of keeping the dollars we try to pay them back with, they choose to exchange those dollars for new T-bonds, T-bills, and T-notes. "

Well said indeed.

Personal request, when can we expect an update of the "Times Interest Taxed" charts? I find it more and more interesting in light of Greece and Spain etc.

[Mike Hinton]

It made me laugh too. But I was wondering what China had to gain by scolding us. I figured they are always trying to establish themselves as an international player, and what better way to project that kind of mentality than to badmouth the world's favorite punching bag, perhaps second only to Israel.

[D]

I was looking for information on how the U.S. will pay China back and your article was top of the list, so I read it. I live in Beijing, as an American ex-pat, and I feel you have taken an enormously complicated situation and over-simplified it.

China holds on to the bonds because it is a major investment. They are literally banking on America being able to sustain it's own economy so they can buy goods manufactured here.

But, you neglect China's internal market. With a population of 1.5 billion people, half of who do not yet own modern conveniences (washing machine, refrigerators, a/c, a new car), the government offers small loans to rural people to purchase these, and their economy continues to grow, albeit at a slower pace than before. SIx percent growth in today's market is nothing short of a miracle, but they are doing it.

As one of America's biggest "investors" they have every right to comment on our inability to save any money at all, and to incur personal debt in the billions. They are actually trying to show us how individuals can help turn the economy around by paying down your personal debt, and save a portion of your monthly income.