« Mitt Romney's Foreign Policy | Blog Home Page | Why Cairo? »
June 02, 2009Chimerica: Owning The Bank That Owns Us
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."
This American leverage also extends to the realm of intervening in internal Chinese policies. Immediately after assuring Chinese officials that the U.S. will reduce its fiscal deficits (details, as always with such matters, are left for some undefined future point), Geitner quickly moved on to encourage Chinese officials to increase their government investments in health care and the ability of their own workers to provide a market for global output, thus hopefully making China a more multi-faceted pillar of stability in the global economy. But whatever its wisdom as policy, the image of the debtor demanding policy changes from the creditor -- especially when the creditor is as jealously protective of its exclusive prerogatives over internal policy matters as China -- is perverse enough to call into sharp relief the odd nature of the Chinese-American financial relationship.
Quite simply, the economic destiny of the United States and China are now linked beyond the ability of government policy or even military crisis to change. If the U.S. goes bankrupt, so does China. China is learning the same lesson with regards to sovereign debt that the bondholders of GM and Chysler have learned with regards to corporate debt -- the value of that debt depends on maintaining a political as well as an economic relationship. What Moritz Schularick and Niall Ferguson have called "Chimerica" may be the fundamental organizing principle of the new global economy. Neither the U.S. nor China can survive without ensuring the health of the other.
The interdependence long highlighted by academic scholars of the neo-liberal school has moved out of the dusty pages of largely unread undergraduate textbooks to become the dominant factor that must be dealt with in diagnosing and treating the global economy through its worst illness in nearly a century. For while interdependence has the power to spread wealth and prosperity, it also has the equivalent power to spread debt and vulnerability. And as the world's largest debtor, the U.S. holds a perverse kind of power over its creditors to force them to continue propping up the U.S. or, at least, not do anything that would fatally undermine the U.S.' teetering fiscal pyramid scheme.
China owns the U.S., but the U.S. owns China more.