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Could the United States and China be even more co-dependent than we thought?
On Wednesday Fed chief Ben Bernanke became the first American official in recent memory to admit just how deep a hole we have dug ourselves with our biggest creditor.
What's a trillion or two among friends?
Bernanke said China holds at least $2 trillion of U.S. government bonds. That is more than double the widely cited official figure, which is published monthly by Treasury.
As staggering as Bernanke's number is, his coming clean comes as a relief. As ugly as our debt problem is, it creates problems for China too -- what to do with all that paper?
And maybe, just maybe, the more facts that are out there, the better decisions policymakers will eventually make. Emphasis on eventually.
"The monthly Treasury series is wildly inaccurate, but it's good that someone's finally willing to say so with the doors open," said Derek Scissors of the Heritage Foundation. "Perhaps with a reasonable figure available, we can see more clearly the implications of China's dependence on the dollar."
Officials in the two countries have been trading jabs lately over each other's unpopular policies. Both have been easy with money in a bid to spur growth, but Bernanke has taken a beating in China and elsewhere for the recent spike in global food inflation.
For its part, China has spent years holding down the value of its currency to boost exports â?? a program that is drastically out of favor here with unemployment at 9%.
The dollars it has purchased in pursuing that policy now expose it to big risks: Scissors notes that China stands to lose hundreds of billions of dollars on its Treasury purchases should the yuan appreciate significantly, as U.S. policymakers would like.
Of course, there is also the question of just how the U.S. will pay off on all its promises. Testifying before the House Budget Committee, Bernanke said in response to a question from Rep. Tom McClintock that China holds as much as a quarter of outstanding U.S. government debt â?? "more than $2 trillion" of Treasury securities.
The comment drew a double-take from McClintock, a California Republican. Apparently referring to the latest official count released by Treasury, McClintock asserted that China's holdings amounted to around 9.5% of outstanding U.S. government bonds.
McClintock is apparently referring to the latest official count, publicized monthly in Treasury's major foreign holders table. Those figures, from November, show that China owns $896 billion of Treasurys.
Both McClintock's and Bernanke's figures foot fairly well with the $9 trillion of Treasury debt outstanding at the end of the third quarter, according to the Fed's Flow of Funds report.
But Bernanke's figure is far more revealing, in that it sheds light on the true size of China's stake in keeping the U.S. economy rolling. It is in line with the estimate made by China watchers such as Scissors, who says Chinese holdings of Treasury and agency debt â?? that issued by the mortgage investors Fannie Mae and Freddie Mac â?? likely range between $2 trillion and $2.5 trillion.
Why do the Chinese hold so many U.S. bonds? It's not because they like us, sad to say. The huge Treasury hoard is a function of China's huge trade surplus â?? Scissors estimates China's 2010 balance of payments surplus at $471 billion, or $39 billion a month â?? and the lack of an alternative to the dollar.
"There is no unified European bond market, and Japan is closed to large Chinese purchases," he writes. "The only market large enough to absorb such huge surpluses is American bonds."
Scissors has been questioning the official Treasury tally for some time. He has noted, for instance, that China's official Treasury holdings remained static over the past year â?? ranging between $846 billion and $929 billion â?? even as the country ran its massive surplus. How is that possible?
Scissors contends it did so in part by purchasing Treasurys through other countries. Over the past year, Treasury's tally of Treasurys held in the U.K. â?? including in the tax havens of the Channel Islands â?? has surged by $355 billion.
Those sorts of purchases will only continue till China changes its ways -- which isn't going to happen tomorrow, not with a national leadership change set for next year.
"China will not break the yuan's peg to the dollar until it can resolve the matter of soaring dollar holdings, and that can be done only through financial reform," Scissors writes.
$2 Trillion?? What about the almost other $1 Trillion in USA Hard cash they are said to have. There is a saying if you owe the bank $5,000 the banks got you by the baby makers,but if you owe the bank $2 Trillion you got the bank.
Two trillion is always such a threatening amount when referring to the amount of bonds that the Chinese hold. Somehow, it seems to be such a small amount when used with the word "obama", as in Obama's six trillion dollar health care scam. As long as a Democrat is running up the bill, it's OK.
Obama's goal is to make the US a socialist company. Marxism 101. Like Lenin in 1918, he could care less if he debauches our currency, engenders massive unemployment, destroys our foreign position, as long as he destroys America as the great defender of capitalism. An old SDS radical just doing his thing all the while using Alinsky-style moderate talk to disguise his actions. The ironic thing is that he is doing so just as countries all around the world have concluded that capitalism is the way to go in economics and command economies, nationalized industries and healthcare, and politicization of decisions that should be made by myriad individuals in markets is a feeble, failed, out-dated approach.
I am not a proponent of "globalization", however as an alternative to having the dollar being replaced as the 'worlds' currency I think that some of what is happening can help the US in the long run. As far as US citizens are concerned, we would be much better off if we went through a depression as opposed to this flood of inflationary spending. Now that China is beholden to our debt it's in their best interest to come to the table and start to provide more than just cheap goods to the US.
We have no choice but to wipe out social security. Create a social support for those who are receiving it now. We also need universal care that would cut health care cost. There will be private hospitals for those who can afford it as well. Put restrictions on welfare. Finally, we ought to stop being selfish and take care of our parents. I dont think we should pay welfare to those who can afford brand new Lexus or any othes luxery car. I am tired of seeing young americans having kids just to get welfare and other services.
China could also decide to buy American goods and pay for the intellectual property that they are not compensating US companies for. Instead of trying to develop an indigenous Aerospace industry, they could buy their commerical airline fleet from Boeing for example. I find it impossible to beleive that "China" couldn't leverage their dollars in a way to reduce their holdings and improve their citizens lives with massive purchase of US products. Last time I checked the US is still the largest economy in the world and still has the largest manufacturing base, implying that maybe, just maybe, we make stuff that people want to buy. Have no illusions, China has chosen a strategy to develop leverage points with the US. They (Chinese leadership) believe that having $2 Trillion plus of US debt will provide leverage in a multi decade serial negotiation. It is very clear, that China doesn't want to sacrifice their national objective of growth and stability with any semblance of a fair balance of trade with US or other developed countries. Supporting growth and stability in China is also important to the US in general, but time to get real and begin the first of many rebalancing moves that will be required. An unbalanced ecnomoy in China and a disfunctional US economy is in no ones best interest. The power of the US is based upon its best in class innovation engine, economic flexability, and ultimately freedom to pursue these attributes, not the dollar....
What do you mean by "That is more than double the widely cited official figure, which is published monthly by Treasury."
Are we ready to officially admit we report incorrect numbers?
You know what they say.....If you owe the bank a hundred dollars and can't pay it.....uou have a problem. If you owe the bank thirteen billion dollars and can't pay it....THEY HAVE A PROBLEM
It looks like both sides have a lot of work to do!
This is ridiculous. It is not a China's problem, it is US problem. There is got to be at least $2 trillion value in the US. One day China will come and ask US to pay it's debt. No, not all at once as some idiots think. That would cause inflation and they don't want that but slowly by selling the Treasurys and acquiring everything that has any real worth. Technology, resources and eventually place under the sun by destroying the hegemony of the American empire. The power of the United States is in the dollar. This is also it's Achilles heel.
China COULD ask us to do something but they wont as they already know the answer. We love to stick our noses in everyone elses business but heaven forbid someone stick their noses in ours.
End free trade with non-free countries immediately. We spent billions defeating communism, now we're spending even more to put the Chinese Central government in a world leadership position. The USA is being used by corporate executives as a shelter for their homes and their investments because bombs aren't currently falling on US soil as they do in the rest of the world. There is no corporate America, only corporate fascism. China will eventually foreclose on the United States when we cannot pay back our bonds. I suspect the Pacific West coast should cover it. Millions will lose their lives in the ensuing war, since the USA outsourced their war production to communist states. The United States will be ruled under communist tyranny, and the corporate fascists will obtain leadership positions in the new world order. Either end free trade with non-free countries or embrace communism. Choose while you still can.
China can ask US to end Fed to comply with US constitution. Win-Win.
what to do with all that PAPER? yeah, funny...
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