Monday, October 21, 2013
All that money and no where to go
Despite Paul Krugman having shown that the withdrawal of Chinese investment is not the disaster many Very Serious Chicken Littles believe it is, too many people have been exposed to their wailings and are afraid. Turns out that they have very little to fear from the Chinese.
Despite the end last week of the 16-day U.S. government shutdown and the extension of the debt ceiling until next year, there are few signs that the situation has reassured China, the largest holder of American debt.The hairball antics of the Republican/Teabaggers do shake their confidence in the stability, and sanity, of the US but so far there really is no other game in town.
With around $1.28 trillion in U.S. Treasury bonds already in its portfolio, China has little choice but to continue to buy U.S. debt, economist say. Government bonds from Japan and Europe are a less attractive investment, and finding other avenues to diversify the country’s huge foreign currency reserves would require major economic reforms and could result in unwanted volatility.
Yet the partisan infighting that brought the U.S. government within hours of a default is increasing domestic pressure on Beijing to reduce its exposure to America.
“The challenge for China is if they don’t own U.S. Treasuries, what would they buy instead?” said William Adams, an international economist for PNC Financial Services Group. “There are not a lot more attractive options out there.”
China, with an economy still heavily dependent on exports, needs a robust American economy to continue to bolster its manufacturing sector and that makes it unlikely that China would stop buying America’s debt in the near future, said Arthur Kroeber, managing director of GaveKal Dragonomics, a global economic research firm in Beijing.
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And for those freaking out, China owns less than 8% of the outstanding Federal debt. Roughly 50% of the outstanding debt is owed to the Social Security Administration, while most of the remainder is owned by Americans. Less than 20% of the debt is owned by foreigners and it is all denominated in dollars so if all else failed, we (or rather the Federal Reserve) could always print dollars to buy them back. And finally, we could retire the entire Federal debt over the next 30 years (if we wanted to) by raising taxes by a mere 3.3% of GDP, which would still give us lower taxes than the average OECD nation. Not that we're going to. Still, that gives the lie to the "we're broke!" bullshit, which is just that -- bullshit.
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