2009 March 14 Saturday
Obama Assures China We Can Pay Our Debts

The Obama Administration feels the need to reassure the Chinese government that America can afford to keep borrowing. I say America is even too bigger to fail than Citigroup. The Federal Reserve will bail out the government by inflating the currency. We'll avoid a default while wiping out debt holders.

“There’s no safer investment in the world than in the United States,” White House Press Secretary Robert Gibbs said yesterday at a briefing in Washington.

Gibbs was responding to comments from Wen that China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” Wen said at a press briefing in Beijing.

On the irony. That's like the drug dealer telling the druggie to stay healthy so that the drug dealer can keep making deals with the druggie. China is our enabler for irresponsibility.

In a nutshell: the Chinese government would ideally like the US to run trade surpluses with some other countries, run no government deficit, and otherwise conduct ourselves in ways that will ensure they can always sell their US Treasury bond holdings for a profit. But at the same time the Chinese government wants to buy large amounts of our bonds in order to depress the value of the Chinese currency versus the dollar so that Americans buy far more from China than Americans sell to China. China wants us to live beyond our means but to stay financially solvent.

As long as some countries want to buy large amounts of US Treasuries as a safe haven holding the US will run a trade deficit and go further into debt to other governments and central banks.

The market has decided that the US government is becoming less able to handle its debt long term.

The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit. The spreads also hit a record last week.

Bill Clinton, George W. Bush, and Barack Obama all got elected by the American people. Obviously we aren't showing signs of prudence in choosing elected officials for high office. This trend looks set to continue. So the higher insurance costs on US government debt seem a rational reaction on the part of the markets. One problem though: Which seller of debt default insurance for US sovereign government debt could possibly afford to pay off on default claims should the US government some day actually default?

Share |      By Randall Parker at 2009 March 14 05:44 PM  Civilizations Decay


Comments
HellKaiserRyo said at March 14, 2009 11:02 PM:

Yes, Clinton did cause some of the problems... along with Gingrich for passing policies that the tax base of the US such as "free trade."

BTW, electing Obama... I do not see how McCain would do better. Maybe Romney, maybe your favorite Tancredo would do better.

Bob Badour said at March 15, 2009 5:49 AM:

I seem to recall saying the US lost the election when McCain was nominated. Personally, I fail to see the relevance of McCain's policies.

Randall Parker said at March 15, 2009 9:58 AM:

HKR,

McCain being bad: That actually strengthens the point I am making. Americans are choosing bad leaders and even bad runners-up.

Anonymous said at March 15, 2009 12:51 PM:

What is this, the Moscow times? Commies and fascists bickering over whose failed socialist state will implode first.

Spare me from the excitement!

Steve Johnson said at March 15, 2009 2:13 PM:

How the heck is the United States government supposed to default on a debt that's denominated in a currency that they have the legal right to print as much of it as they please?

Clinton, McCain, Obama, Bush, are window-dressing. Washington is run by no one. It's an out of control machine that can't help but expand every single thing that it already does. It can't even get good information about whether or not any of this would be a good idea because every official media source only reports things to influence the bureaucracy.

Obama hasn't even come close to appointing all of the 1k+ people that require Senate approval and the government keeps rolling on doing pretty much exactly what it did before the election.

Fact is, as bad as the American people are at choosing leaders, we don't even really have that responsibility.

Eric Stratton, Rush Chairman said at March 15, 2009 2:37 PM:

This is another Chinese shit-test, intended to prod and poke Obama and see how he reacts. First we had the naval incident (shades of the Chinese shoot-down on our spy plane weeks into Geo. W. Bush's first term) and now the Chinese threatening to have Obama knee-capped if we don't make good on our bonds.

Nobody held a gun to the Chicoms' heads and made them buy this debt, they did it willingly. This is nothing more than Beijing trying to see how much they can bully Obama. And it looks like he failed the test, since he immediately started to tap dance, repeating the "no safer investment" platitudes. He should have just ignored it, and if asked at all, just said that the notion that we would default is so silly as to make it not worth commenting on.

Bob Badour said at March 15, 2009 2:47 PM:

Eric,

Are you trying to suggest tap dancing is in his blood or something?

HellKaiserRyo said at March 15, 2009 6:09 PM:

What are the relative odds of a US sovereign default compared to countries such as Japan and Great Britain?

Maybe we can say Great Britain defaulted on their debt already as they plan to utilize QE.

kurt9 said at March 15, 2009 6:55 PM:

The Chinese will be able to make good use of this issue, like getting the U.S. government to drop the wassau restrictions on the import of advanced semiconductor process technology into China as well as telling U.S. politicos such as Clit-bitch and Goering where to shove it on global warming. It is finally time that some of the people in the rest of the world stand up to the idiots in Washington D.C.

Skot German said at March 15, 2009 8:03 PM:

Why does China thing it is to their advantage to hold US treasuries rather than spend them? If China would start spending their saving on US goods it would help get the US economy out of a recession and it would lessen China's risk of having their savings devalued.

Stephen said at March 16, 2009 7:07 PM:

Skot said, "If China would start spending their saving on US goods it would help get the US economy out of a recession"

What does the US manufacture that isn't better and cheaper elsewhere? No doubt there must be something, but there aren't enough 'somethings' to make an appreciable dent in the US deficit.

Bob Badour said at March 17, 2009 9:31 AM:

Stephen,

And the reason for that is largely the bonds China owns. If China did not manipulate prices, things from China would be nowhere near as cheap as they are.

Fong said at March 17, 2009 10:43 AM:

"And the reason for that is largely the bonds China owns. If China did not manipulate prices, things from China would be nowhere near as cheap as they are."

Maybe it is better for China to hold the bonds and keep Chinese stuff cheap and their people employed than to allow it to get cheaper to make stuff in the US?

Bob Badour said at March 17, 2009 7:25 PM:

No, it isn't better. The overall policy is inflationary by hiding growth of the US money supply behind growth of China's money supply; even though, the effect on consumer goods prices in the short term was deflationary. The inflation simply appeared in asset prices until recently, which in the end collapsed into a deflationary economy that will probably involve the irony of increases in consumer goods prices. That spells massive economic hardship for Americans.

It basically destroyed much of America's wealth producing capability (capital) and in the end destroyed much of America's wealth. That's not better. That sucks.

Fong said at March 18, 2009 7:29 AM:

"No, it isn't better."

I should have said "better for them." I wasn't clear.

Bob Badour said at March 18, 2009 1:01 PM:

I am not even convinced it is better for the Chinese. I expect there will be massive dislocation in the Chinese economy too, if there have not already.

And at some point, Europe and North America will engage the trade war.


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