Sell To Whom?
link Analysis: What is Plan B if China dumps its U.S. debt? | Reuters.
This topic has been the source of hand wringing for the past decade and recently, getting more and more play. While there is no doubt the U.S. has been profligate in its spending habits and irresponsible in ramping up total national debt, particularly the past 2 years, the fear of the Chinese dumping debt is not the issue it has been played up to be.
While large, the entire debt holdings of the Chinese are about 9% of the outstanding amount, the vast majority still being held by domestic American holders. At 9%, 900 billion of U.S. treasury holdings is still a large amount of course. But the Chinese are in a precarious situation themselves. Unless their own domestic consumption can absorb the production pushed out by their low cost factories, they themselves will be unable to sustain them. Without the benefit of a willing consumer market like the U.S., a market like no other, the Chinese cannot sell their goods. Only the Americans have the idiot mentality of buying something just for the sake of buying something. It’s very catch 22. Metaphorically, the Chinese run a bar which extends credit to it’s main frequent customer, America. Sure the bartender can cut off credit from the patron, but they would also cut off their main customer. What to do.
In the case of foreign exchange, if the Chinese were to place all their export loot into their own currency rather than U.S. dollars, their currency would skyrocket, undercutting their export advantage. As far as things are now, the Chinese are held captive by this trading dynamic. That doesn’t mean they can’t exert influence on U.S. affairs and it is in this area that things get tricky. We have to fully acknowledge that they are helping to maintain financing of U.S. debt at an artificially low rate. They may not pull their support, but there may be concessions sought on tricky trade issues. Taiwan for instance. Sensitive technology transfers as well. In effect, the Chinese have as much interest in selling U.S. debt as the bartender has of losing his best customer. They are buying market share.
It’s not as if the Chinese can sell refrigerators, T.V.’s, sofas, toys, video games and jeans to anyone else in the world on the scale at which they sell to the Americans. So the worry about debt dumping is woefully misplaced. The real dark side of the debt bomb is when they decide to start buying U.S. assets with the money. That’s the lurking problem.