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The Chinese Hallows…til Debt do us part

July 27, 2011

This article reminded me of the kids story “The Deathly Hallows” embedded in the last book of the Harry Potter series. It’s a story of three brothers who cheat Death, negotiate with Death – two of whom very quickly die and one of whom lives a long life under the protection of an invisibility cloak. After a long productive life, the third brother chooses to go off with Death as “an old friend” by removing his invisibility cloak, once he is an old man.

Moral of the story: whether it’s sooner or it’s later, eventually everyone faces Death – there’s no immortality & seeking after it causes more destruction than facing it courageously when it comes. In fact, much of the Harry Potter story is framed by a character fundamentally afraid to die.

What does China have to do with the Deathly Hallows?

In the US spending spree started by Bush (boo) and accelerated at triple the rate by Obama there were a few fundamental assumptions that largely involved cheating Debt, not Death.

The US was like brother number 1 under Bush with the all powerful elder wand – under a philosophy of obligation to bringing democracy to the world whether they wanted it and were ready for it or not, here it comes. Zap – and then Debt caught up with Republicans in ’08.

Obama’s administration is brother #2 – attempting to use the resurrection stone to bring back the economy of the 1990’s, or the 1950’s or – oh jeesh, let’s bring back 1943. Turning the stone of Keynes repeatedly, ghosts of loved industries and the progressive coalition dream begin to come to life…but are just out of reach because it’s a false resurrection driving the likes of poor Paul Krugman utterly mad.

Which brings us to China – the assumption seems to be that the invisibility cloak of the Chinese buyer of US treasuries would allow the US to cheat Debt indefinitely. The third brother was wise enough to recognize that fact – I’m not sure the USA is there yet.

Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”

…China, the largest foreign buyer of US government paper, will soon say, “enough.” …lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?

The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame.

Well, like any marriage, there are vows. In this one it appears the vow was not “til Death do us part” but instead “til Debt do us part”

3 Comments leave one →
  1. July 28, 2011 11:56 am

    Point well taken, except that the Federal Reserve is the largest holder of U.S. debt!

  2. GaryP permalink
    July 28, 2011 6:05 am

    I would suggest reading Mike Pettis’ blog (China Financial Markets) to understand how running a current acct surplus (China) ties China to the nation with a current acct deficit (US).
    The Chinese are the other half of the coin of US over consumption. They cannot stop buying US assets (i.e. Treasury bonds, land, companies, etc.) unless they stop selling to the US. If they stop selling to the US, their economy will collapse.
    China, by their mercantile policies (keeping their currency pegged to dollar to prevent appreciation against the dollar as would have happened otherwise) have benefited their domestic industries by facilitating US bankruptcy. This is similar to the situation Germany and Greece are in.
    Yes, Greece overspent–with the implicit encouragement of Germany. Germany allowed Greece to share a common currency that allowed Greece to over borrow with no consequences–until there were consequences. A common currency (Euro for Germany/Greece–dollar and dollar peg for US/China) without a common fiscal policy always results in imbalances and ultimately default as the ant (China or Germany) gives the grasshopper (US or Greece) the debt rope to hang themselves.
    Moral arguments aside (Is the dope addict or the dope dealer morally responsible for the overdose?). This is co-dependent relationship that is bad for both sides. The grasshopper loves “free stuff” until they have to pay the bill. The ant loves to “sell stuff” until they realize that they gave credit to someone that can’t pay.
    The US should have followed policies that encouraged sensible borrowing (market interest rates, sound lending rules, letting bad banks fail, letting markets function) and China should have been rewarding their consumers for their work instead of connected insiders by forcing businesses to pay market interest rates, providing property rights to citizens, etc.
    This would have forced the US to produce, not just consume, and allowed China to consume not just produce.
    We (China and US) were joined at the hip by our stupid, short-sighted rulers and we will implode together.

    • Lynn Comp permalink*
      July 31, 2011 10:44 pm

      The article confirms what Jim and I have both seen data to support – China is focused on bolstering local demand and local economies in lieu of selling to the USA. It won’t be immediate, but they started working on it in ’08 if not beforehand. They have a much larger opportunity for consumer demand internal to PRC than external at this point – the only question is whether they can manage to tweak the jobs machine without giving up single party rule…

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