China is the world’s second-largest economy. The country is also the largest holder of U.S. government debts. Over the last 40 years of its soaring economic growth, China’s export machine has hoarded more than 3 trillion worth of foreign currency reserves — the majority of which are denominated in the good American dollar.
Seeking both safety and investment returns, like a well-fed Peking duck, the Chinese government has been eating up America’s debts every year over the last four decades. That was until recently, when the duck woke up and stopped eating. It was too much and too fast! Instead of buying new U.S. government debts, the Chinese has been selling them and moving its money elsewhere — investing in natural resources in Africa and South America. It was, perhaps, for a good reason.
The U.S. Federal Reserve is printing $85 billion of new paper money every month in order to drive down interest rates for home mortgages and other financial instruments across America. While the frivolous spenders during the recent mortgage crisis get to catch a second chance of home ownership, which is good for artificially prompting up the American economy, the Chinese have seen the value of its U.S. dollar holdings dropping like a rock amid a super low interest rate environment.
On top of low returns and daily devaluation of the USD, the Chinese are waking up to a new reality: the possibility of losing their investments due to the U.S. government shutdown under the threat of Uncle Sam refusing to make interest payments on those government papers.
Between anxiety and political reality, the Chinese has certainly felt a sense of unease. That would be really bad news for America — America cannot afford it. We need the Chinese to keep buying our debts in order to keep our government offices open.
There is only so much you can do to negotiate with your bankers, said former Secretary of State Hillary Clinton [release from WikiLeaks]. Mrs. Clinton was right. Unless America gets its economic house in order, the Chinese may not hang around too much longer supporting our nation of debts.
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