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Reliance On China Continues

Published 06/25/08 Jeff Bennett - Print Article
E-mail - editor@economyincisis.org

China continues its practice of purchasing U.S. bonds, notes and equities – rising to $115.1 billion in April, according to RGE monitor – to finance our massive debt and over-spending. This has led to rising rates of inflation and a decrease in the value of the dollar as we simply print more paper money to sell to China, who financed $405.5 billion of our government’s debt as of December 2007.

Last year China threatened to sell their collection of U.S. investments. This would essentially wreck our economy, sending us into a tailspin. New spending limits need to be addressed to decrease our foreign debt and trade deficit. We cannot become dependent on China to provide us with money so our consumption can exceed our income. Sovereignty cannot be achieved through our foreign dependence.

Source RGE monitor:

China is adding to its holdings of U.S. assets, data from the U.S. government showed yesterday, easing concern the Asian nation will sell dollar investments. Total holdings of U.S. equities, notes and bonds among foreign investors rose by a net $115.1 billion in April from $79.6 billion the previous month, the Treasury Department said yesterday in Washington. China’s holdings of Treasuries gained $11.4 billion to $502 billion, holdings of U.S. agency debt rose $11.9 billion and U.S. corporate bond investments increased $6.9 billion, data showed.

The discussion about whether or not China will continue funding the US deficit by buying dollar assets has been going on for a long time, and has caused an unnecessary amount of alarm among analysts worried about the consequences of a possible Chinese decision to stop buying dollar assets – without Chinese purchases of US securities, they worry, how can the US possibly finance its ballooning trade deficit? Yet time after time the data show that China continues to add to its dollar hoard – sometimes in amounts close to or even greater that the US deficit, as Brad Setser recently implied – and so for a little longer those concerns “ease”.

If you believe that the explosive growth in the US trade deficit since the late 1990s was caused primarily by a sudden massive increase in the desire of US consumers to consume, then it may make sense to worry about how the deficit must be financed. After all according to this view, the cost of out-of-control consumption by Americans exceeds American income, and so this requires some foreign saver to finance the consumption. At the individual level it was the wealth effect of rising stock markets and real estate prices that allowed Americans to increase their consumption, but in the aggregate a country running a current account deficit by definition needs external financing. Should this financing stop, US consumption would have to drop drastically in order to eliminate the current account deficit, and with it the US (and world) economy would slow sharply.

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