In September 2008 China passed Japan to become the US government's largest foreign creditor. China's investment in US Treasury Bonds surged to $585 billion in September, pulling ahead of Japan which now holds $573 billion worth. Overall, China's holdings may be $800 billion or more.
China is also thought to be purchasing US debt through third countries. China now owns nearly one dollar out of every ten dollars in US public debt. According to some reports, China and Japan hold almost half of the US debt held by all foreign countries.
Simply stated, the US owes a lot of money to foreign countries, of which China and Japan are our biggest creditors.
It’s sort of like owing money to China for the monthly house payment, and owing Japan for the monthly car payment. The monthly paycheck has to go to these creditors. And, more money must be borrowed to buy other things like new household goods (i.e., “stimulate the economy”) or fund retirement plans (i.e. “social security”). For the US, foreign countries have become our bankers.
The US Is Continuing to Spend Money It Doesn’t Have--
The US now wants to spend more trillions of dollars. In 2008 there were the $160,000,000,000 “stimulus checks” and $750,000,000,000 TARP funds to “bailout” the banks. In 2009 under President Obama’s administration we already have the $800,000,000,000 “stimulus package” and the 2010 budge is announced to be more than another $600,000,000,000. Other billions ($30,000,000,000+) have been paid to automobile companies.
Further, President Obama has announced projected budgets involving the spending of trillions of dollars which the US does not yet have.
The money needed to pay the US past and future public debt must be obtained from (a) future taxes or (b) the printing of money or (c) continued borrowing from China and Japan and other countries.
Taxes Can’t Cover the Spending--
Even if the incomes of our nation’s “richest” and “wealthiest” citizens were taxed at 100% the money would not be enough to cover even half of the projected spending. See my other posting— "$250,000 Minimum Wage.” The US will be increasingly forced to rely upon China and Japan as the US seeks to raise money.
In February 2009 Secretary of State Hillary Clinton returned from Asia where she urged China to keep buying US debt and to work with Washington to fix the global economic crisis. She said Washington must incur more debt to China to boost the ailing U.S. economy (and stimulate demand for Chinese products). She says it would not be in China's interest if the US is unable to get its economy out of a recession.
Continued Printing of Money Won’t Cover the Debt—
In short, printing money cheaply does not create wealth, but simply dilutes the purchasing power of existing dollars. See my other postings— “Fiat Money Inflation in France,” “Redistribution” and “Real Silver Coins.” Besides, China and Japan would not be pleased if we paid our debts to them with dilluted dollars.
How the US Borrows Money—
A great amount of money is borrowed from foreign countries. How so?
Well, the US imports a lot of its consumer goods from other countries. Take a look at the labels on products and see where they are made. Most products today are made in China and Japan and other foreign countries. The US trades US dollars for goods made in Asia and elsewhere— the US accumulates a lot of Chinese goods, and China accumulates a lot of US dollars.
The US borrows back some of those dollars held by China and others to cover some current obligations the US can't pay simply by raising taxes and printing money (e.g., roads and building projects, military expenses, Medicare and Social Security).
The US gives its promise in the form of an “IOU” called a Treasury Bond or Treasury Note or Treasury Bill. All these “promissory notes” require that the US pay back the loans in the future, with interest. Bonds are long-term debt instruments and may be due in 30 years, Notes may be due in 2-10 years, and Bills are usually short term debts due in 13, 26 or 52 weeks.
China and Japan loan US dollars back to the US, taking these Treasury debt instruments in return. In short, these countries trust the US to repay the debts, plus interest. The US must repay these debts. Mature notes may also be replaced with new notes-- sort of like constantly re-financing the house.
At some point China and Japan may want some collateral for the debts. I.e., China and Japan may want something to repossess in case the US defaults and can’t continue to pay its debts with interest.
China Will Have Alaska Oil --
It is conceivable that China will insist upon something other than a simple unsecured promise of the US government that it will pay its debts. (Recall how France used lands seized from the church as collateral to back its fiat money in the 1790s).
What does the US have to use as collateral?
The US has unused oil reserves in Alaska (because federal law prohibits development there by US citizens and companies— the federal government would rather US citizens trade some of their dollars to other foreign countries for oil).
With its expanding population and need for natural resources, it could be only a matter of time before China insists on getting repaid in oil instead of more paper dollars. China may insist that the Treasury Bonds and Notes be secured by using the oil reserves as collateral—sort of like how the bank takes a mortgage on the house. If the debt is not paid, the bank seizes the collateral (such as the house, or car, or oil). Or…
Maybe Japan Will Protect Alaskan Oil from China--
A twist on the above scenario might be that the US would refuse to pledge its oil assets to China. Japan is an ally of the US. Japan has the world’s second largest economy after the US. Before World War II Japan had the world’s largest navy.
Could it be that, rather than allow China to get Alaskan oil, the US will strike a bargain with Japan for Japan to assume the US debt to China in exchange for US oil? Would the US turn over its Alaskan oil to Japan if Japan would help the US get out of debt to China? Could it involve a scenario where Japan would use its Navy to protect Alaska from China (if the US couldn’t even afford a strong navy anymore)?
It’s because the US is spending more than it can afford that these questions are even considered.
China's premier Wen Jiabao expressed concern (Friday March 13, 2009) about China’s massive holdings of Treasuries and other U.S. debt, appealing to Washington to safeguard their value. He noted that Beijing is the biggest foreign creditor to the United States.
"We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."
Inside China there has been a lot of debate about whether they should continue to buy Treasuries.
Venezuelan President Hugo Chavez sought Arab support Tuesday (March 31 in Doha, Qatar) for a proposed oil-backed currency to challenge the U.S. dollar in his latest swipe at Washington's dominance in global financial affairs.
While it's highly unlikely Chavez will gain any serious momentum for his "petro-currency" proposal at a summit of South American and Arab League leaders, it represented another attempt to undercut the dollar's standing as the world's leading commercial currency.
China has struck deals—most recently this week with Argentina—to conduct trade in currencies other than the dollar. Iran has proposed replacing the dollar with the euro or other currencies to set worldwide oil prices.