Chimerica: Owning The Bank That Owns Us

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An old axiom points to the perverse nature of high debt: When you owe the bank a million dollars, the bank owns you. But when you owe the bank a billion dollars, you own the bank.

At this point, the United States debt to China is approaching a trillion dollars, with no end in sight. And U.S. Treasury Secretary Timothy Geitner is in China now attempting to calm restlessness over seemingly out-of-control fiscal deficits while wheedling reforms out of the Chinese economy at the same time.

The biggest concern, of course, is that China will begin to scale back its purchase of U.S. government debt or, in a scenario feared by many conservatives, use the threat to "dump" U.S. securities as leverage over the United States. Either scenario could be economically devastating to the U.S., as decreased demand for U.S. debt would increase the costs of borrowing by driving interest rates upward while at the same time causing strong inflationary pressures as the Federal Reserve "monetized" the deficit by in essence creating new money with which to buy U.S. debt from itself.

But while these concerns over the impact of creating more U.S. debt than the global market can absorb are valid, the scenario of China as the Potter-esque banker foreclosing on U.S. government debt are probably overblown. China simply cannot credibly threaten to undermine the value of U.S. securities without destroying its own economy. The following comment by a Chinese finance official is revealing: "We hate you. We hate you. But we will buy your bonds."

Jason Steck is Resident Instructor in Political Science and International Relations at Creighton University. He is also managing editor of Poligazette. He can be reached by email.
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