America’s Deficits, Debts and Diplomacy
The only reassuring note made by Thomas is that for the holders of these notes to cash them in would amount to bringing the entire global financial house of cards down, something he accurately calls “Mutually Assured Financial Destruction”.
That is the good news. The bad news is that the holders of US Treasury notes must continue to buy the notes in order to finance America’s ballooning debt. Should they reduce their purchases significantly, the support mechanism will be weakened, i.e. there will not be enough financing for the interest on the notes. As it is, over 20% of the $4 trillion (more since I began writing this blog) in notes is held by two countries – Japan and China. Japan can probably be relied upon to continue lending a helping hand, but China could for various reasons decide buying US Treasury notes is not a good idea. One disincentive could be the wonky dollar. After all, why would China want to invest in a reserve currency that is losing value?
The other implications of the soaring debt are diplomatic, political if you will, but none the less worrying. That is where China comes into the equation.
The United States has been sending mixed and not very reassuring signals to China for some time; now with the neoconservatives the driving force behind US foreign policy, those signals look more like storm clouds.
Rice makes the statement that China is not a “strategic partner”, nor an enemy. She goes on to criticize China’s designs on Taiwan and China’s objection to the American military presence in that region. The United States seems to somehow regard its military presence as imperative in every part of the world. Now, a recent CIA analysis of China’s growing power and the threat it poses to American dominance in that region. The US may be able to slow down the Chinese juggernaut, but not stop it.
The US continues to pressure the EU not to relinquish its ban on arms sales to China, but that is wishful thinking. The prospect of arms sales to China are just too tempting, and sooner rather than later, that ban will have to go.
So, how does all this relate to the US Debt? Well, China as one of the two biggest creditors of the United States, hold $200 billion in US treasuries, and so far has cooperated in continuing purchases of these ever more suspect pieces of paper. The mere rumour of a Chinese reduction of purchases some weeks ago sent the dollar down.
The US wants China to let up on Taiwan; they want China to revalue the Yuan; they want China to intervene in the nuclear dispute with North Korea. The US is pressuring China on many fronts while China fills its poker hand with aces by acquiring and holding US treasury notes. How, I ask, can a debtor nation like the United States exercise any influence on one of its two major creditors?
It is highly unlikely, no, almost impossible that the US can address and rid itself of its indebtedness to China in the foreseeable future, so what is the answer to dealing with China?
For me the solution is clear. First, the US has to recognize the inevitability of Chinese predominance in Asia, both commercially and politically. Second, the US should give tacit approval to the Honkongnisation of Taiwan, an utterly useless ally, nay, worse than that – it is the obstacle to partnering and working peacefully with China.
Unless the United States accepts its regional demotion and recognize that it is no longer the major player in Asia, it will lose out altogether. Even the most committed of the neocons cannot contemplate armed conflict as a way of prevailing over China, so a pragmatic diplomatic solution is the only one.
Above all, the US should cease talk of a shifting balance of power in the Taiwan Straits. The presumption that there could be a “balance” between China and the island of Taiwan exemplifies the unrealistic and myopic US policy toward China.
To do so is not solely a question of mollifying a potetnial threat, it is also for the purpose of assuring a malleable and friendly creditor – better a banker your friend than one who wants to foreclose on your farm.