Wondering Why The Chinese Laughed at Geithner?

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In a recent Wall Street Journal/NBC poll, 49% of Americans said they were concerned a great deal about federal deficits and government involvement in the economy.

America's gross government debt is expected to climb from 62% of national income to 106% by 2015 — a level not seen since the aftermath of World War II. Meanwhile, gas price volatility is in full swing.

If Americans are worried by this mounting debt and the cost of energy, imagine how those lending us the money must feel.

Treasury Secretary Tim Geithner likely got a sense when he visited China in early June. China holds $760 billion of the $3.26 trillion in U.S. Treasury securities owned by foreigners, more than any other country. It holds an additional $600 billion in other U.S. government debt.

When Geithner tried to assure an audience at Beijing University that their investments were safe, he was greeted with nervous laughter.

Fiscal Laugh Riot?

There are lots of reasons that laughter matters, but here's a big one: Interest demanded on 10-year bonds went up more than 50% from just over 2% in January to nearly 3.7% at the end of May. That's tens of billions of dollars in added interest that taxpayers will need to repay over the time of those loans.

The higher interest charges reflect rising concern among lenders, such as the Chinese, that inflation will devalue their returns. The more fearful they become, the less likely they will be to lend us more money, and the higher interest rates we'll have to pay to induce them to do so. Higher rates make economic recovery tougher.

So what's a government to do? The logical approach would be to find all possible ways to reduce our debt and send a signal to our lenders. Top of the list on the energy front would be to tap domestic resources, including offshore oil and natural gas. This would boost production, spur economic growth and raise additional federal revenue.

Unfortunately, that's not the approach the Obama administration is taking. Instead, it's punching buttons on its remote control, trying to get a program it thinks will be popular, even if ineffective.

For example, it says it wants to raise more taxes on traditional energy industries such as oil and gas. But such taxes only weaken the competitiveness of American companies and leave a void that will be filled by competitors such as the Chinese.

The administration says it could slash future federal spending. But most future federal spending goes for entitlement programs, such as Social Security and Medicare. Cutting their future funds would require reducing future retirement benefits or raising the retirement age or both while slashing medical and drug benefits.

How many years of retirement should Americans give up to avoid drilling for oil offshore? How much more should they pay for their prescriptions?

A solution is right under our nose. Tapping our offshore oil reserves could contribute $8 trillion to GDP and raise $2.2 trillion in tax receipts to help pay off our debt.

Imagine you are Chinese, and you are peering in on the American economy from afar. You see a debate taking place that doesn't compute. Debt is up and the value of the dollar is falling against currencies such as the Mexican peso and the Canadian dollar, which drives gas prices up because America gets most of its foreign oil from Mexico and Canada (yes, that's correct).

All the while, America has access to one of the most enviable sources of offshore oil and gas in the world, one that could create jobs and stimulate the economy.

And yet, as you watch this American reality TV show, you see oil companies continually prohibited from going after it.

As an energy-thirsty country yourself with many financial decisions to make, you have a dilemma — do you lend more money to America or go after that oil yourself?

Letting Our Foes Drill

China along with Cuba and Russia are beginning to do the latter. While we debate, they are inching in on our supply.

Cuba has announced plans to develop oil in the Gulf of Mexico.

Russia's ambassador last fall announced that companies from his country had "concrete projects" to drill for oil and gas in the Gulf.

And Chinese firms appear to be playing a role in development in this arena.

America is at a unique and dangerous crossroads in its history. The reality we should care about now is that gas prices are volatile even as unemployment rolls are swelling in the worst recession since the Depression. Increased dependence on foreign entities for our oil and the financing of our government debt is no longer sustainable.

Rather than face this reality by taking practical measures to extricate ourselves, such as tapping our domestic oil and gas resources today, our political leaders talk about the tough measures they will take to repay our debt tomorrow.

And they wonder why the Chinese laugh.

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