The View From 1776
Friday, March 13, 2009
China Puts Us on Notice
China’s premier publicly expressed concern that the Obama administration’s present and prospective surges of deficit financing are impairing the creditworthiness of the massive amounts of Treasury debt that China holds as our largest creditor.
The Wall Street Journal reports, in its March 13 edition (Wen Voices Concern Over China’s U.S. Treasurys):
BEIJING—Premier Wen Jiabao voiced confidence in China’s economy, saying his government’s finances give it room to spend even more to support growth if needed, but expressed concern about the outlook for the U.S. and the safety of its Treasury bonds…
“We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries,” Mr. Wen said in response to a question. He did not offer specific suggestions on economic policy to the U.S. government, but called on it to “maintain its credibility, honor its commitments and guarantee the security of Chinese assets.”
Intervening to deflect the normal and necessary course of an economic cycle, and alarmingly to use the recession as a pretext for a sharp move toward socialistic collectivism, the Obama administration is playing the same hand, in spades, that created the housing bubble and the related plague of speculative investment vehicles. The likely end point of the limitless expansion of Federal deficit spending proposed in the President’s budget is reducing Treasury debt to junk bond status, along with surging inflation and further devaluation of the dollar.
We got into this mess because the Fed wildly over-expanded the money supply continually after the Clinton-era dot.com boom and bust. That produced the illusion of a strong economy, without the necessary foundation of real savings and investment, which led individuals, businesses, and financial institutions to freight themselves with more debt than could be serviced with real underlying income. Maturing consumer and business debt could be repapid only with larger amounts of new debt to cover principal and accrued interest.
Fed chairman Bernanke’s acknowledged devotion to Keynesian economics already is evidenced by his flooding the market with so much excess money that 90-day Treasury bills are at negative returns after adjusting for inflation. With Bernakne and Obama racing alongn the same Keynesian path, we are simply building up to a new credit crisis.
The Federal government is, in effect, saying that the cure for today’s hangover is to drink a whole case of whiskey.
China has good reason to be worried.