Tuesday, July 29, 2008


Reader SharkGirl responded to this post with this question:

Is it true our IRS rebates came from money borrowed from China?
The answer is yes and no.

It is true that the government had to borrow the money for the economic stimulus payments that were sent out earlier this year. And it is also true that China is a major holder of US debt. The last time I looked they were holding over three quarters of a trillion dollars of US government debt.

However the government did not go to China with its hat in its hand and ask for a loan to finance the stimulus package. They simply wrote the checks and issued securities to cover the cost and let anyone who wished to purchase them.

Other holders of US debt are insurance companies, mutual funds and various pension plans. Individual investors also purchase US government debt because it is backed by the full faith and credit of the United States of America it is considered a good investment.

Different people look at the vast amount of US debt being held by the Chinese in different ways. Liberal Democrats view the matter differently depending upon who is in the White House. If the president is a Democrat their attitude is:

"China's decision to invest in the US economy is based upon the confidence they have in the wise and visionary leadership of [insert the name of the Democrat president]. This does not represent a problem but rather is a strategic partnership which will bind our two nations closer in ties of friendship and economic cooperation"

If the president is a Republican their attitude will more than likely be:

"Our children's future is being sold to a foreign power by the incompetent policies of [insert the name of the Republican president and append the word "Hitler" to it for good measure]. This catastrophe only proves the need for massive tax increases and a radical diminution of the American citizenry's liberty"

The attitude of Libertarians is going to be:

All US dollars spent overseas will eventually come back to the United States, even those used to purchase oil (which is traded in dollars) will eventually find their way back to the US because that is where things are sold for dollars. We are sending large amounts of dollars to China in order to purchase their low price consumer goods and they need something to do with those dollars (other than making the oil purchases which are fueling their economy) so of course they are sending those dollars back to America.

In addition to buying up US debt they are also buying some American products, for example American SUV's are all the rage in China. The Chinese believe that America will honor its debts and so they see US debt as a good investment.

No American should worry about this because this massive investment means that China has a very large stake in the United State's economic health. After all they don't want to lose that 3/4 trillion dollars - do they? This makes it much less likely that China will do anything to damage the US and certainly they will not risk actual hostilities with the US. Libertarians have always believed that borders which are crossed by trade with never be crossed by soldiers so we should keep doing exactly what we have been doing with regard to China."

Conservatives see thing this way:

Our current relationship with China has undoubtedly brought benefits to both nations. American money has allowed China to expand its economy and bring a level of prosperity to its citizens which they have never known is all the history of the world. Along with that new economic freedom has come some measure of additional personal liberty and as long as China continues on its present course that trend is likely to continue.

America has benefited by the cheap Chinese products in that its lower economic classes are able to have a higher standard of living than they would otherwise enjoy. The Chinese practice of buying up US debt has allowed the US government to do things like fight the war in the Middle East and mail everyone an economic stimulus check without raising taxes and that has also benefited the American people, at least in the short term.

However there is also a great deal to worry about here. China thinks of America as its primary adversary upon the world stage. Their short and medium term plans call for the creation of what Japan once termed the "Greater East Asia Co-Prosperity Sphere" - with China rather than Imperial Japan in the driver's seat. The Chinese clearly intend to exert hegemony over all of Asia, including Japan, and they clearly intend to turn the South Pacific into an Chinese lake.

The American government sees Chinese attempts to penetrate our electronic security coming with increasing frequency and Chinese espionage against the US is approaching the levels previously seen from the KGB before the downfall of the USSR.

The Chinese are actively attempting to steal every political, military and industrial secret they can from the US and they are developing the ability to launch a cyber attack on the US which would take down our power grid, crash our banking and financial systems, take our land line and cell phone networks off line, crash the Internet, take down the air traffic control network, make the routing of trains impossible and disrupt military communications.

The Chinese are building a blue water navy to challenge the US Navy and deny the US any ability to support Taiwan in the event that the Chinese government decides to retake the island by force. They also intend to be able to place enough force on the table to deter the US from aiding the Philippines when China annexes the Spratley Islands - and their oil and gas reserves.

The Chinese are also building an ICBM force which can deliver a nuclear payload to any point in US territory (thank you Bill Clinton).

While the Chinese do regard US debt as a good investment they also see it as a potent weapon. Should the Chinese desire to do so they could inflict serious damage to the American economy by dumping that debt onto the world's financial markets. This would cause a major devaluation of that debt and of the US dollar. It would trigger a major loss of confidence in the US economy and lead to other nations pulling their investments out of the US. Oil would begin to be traded in Euros rather than dollars which would lead to further devaluations of the dollar.

This could very well send the US economy into a depression like the one we suffered through in the 1930's. Of course the Chinese would lose their 750 plus billion dollars, but might they not consider that price to win a world war to be well worth paying?

Clearly China represents a difficult problem for the US. America must get its fiscal house in order and the first step in that process is balancing the budget. Along with that we must once again tie our currency to gold so that it can not be inflated to anything like the degree we see now. America must pay down its debt so that it cannot be used as a weapon against us. We must improve our electronic security so that our critical systems are no longer vulnerable to hostile hackers and we must step up our counterespionage efforts in order to protect our secrets.

We must also evaluate the Chinese military, especially naval, buildup and maintain not just superior but overwhelmingly superior forces. The Chinese must not be tempted to think, even for one second, that they can move against the Spratleys, Japan or Taiwan without triggering an utterly crushing response from the United States.