Tied Together

I was a in recent debate with a friend of mine about the dangers of accumulating foreign debt. His contention was that the risk of foreign governments abruptly “calling in our debt” would have catastrophic ramifications. My point, in the broadest sense, was that because of the interconnectivity of the global economy, it wouldn’t really be in anyone’s interest — and in particular, not China’s — to sink the world’s largest consumer economy. That is, China has lent us a great deal of money, which has in turn allowed us to buy a great deal of Chinese goods. This is part of the reason China has sustained unprecedented growth, and indeed, part of the reason the Communist party has held such a grip on government. If economic growth halts, the Communist party risks fomenting dissent. It is therefore in the best interest of both China’s economy and the government in power not to cripple the American economy. But why take my word for it? Here’s Gao Xiqing, president of the China Investment Corporation, which manages most of China’s the “high-visibility investments.”

With so much of China’s money at stake, did U.S. officials consult the Chinese about the rescue plan?

Not directly. We were talking to people there, and they were hoping that we would be supportive by not pulling out our money. We know that by pulling out money, we’re not serving anyone’s good. Including ourselves. So we’re trying to help, at least by not aggravating the problem.

Let me start by saying I could be completely wrong about this, but it seems to me that it doesn’t even matter to China whether or not we ever pay them back, so long as we have the ability to do so. China’s finances are trusted, in large part, precisely because they own so much US debt. Furthermore, barring utterly catastrophic economic collapse (they run a yearly surplus), China wouldn’t need to call in American debt because they can simply print money with the understanding that it’s backed by the $17 trillion yearly US economy. This is why we are no longer use commodity based money.

This is not to say there aren’t long term scenarios that present less than ideal outcomes for Americans. For example, if the Chinese are able to induce domestic demand for Chinese products (not at all a given thanks to cultural considerations that heavily value saving), the need for American trade is lessened quite a bit.

Anyone who knows more about global economics than me is welcome to comment.

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