IF you owe a bank a little money and can’t pay, you’re in trouble – but if you owe a lot of money and can’t pay, the bank is in trouble. But what happens if you owe the bank a lot of money you can’t pay, but still need to borrow more? That’s the dynamic at work in our relationship with China.
Beijing has so far been willing to lend us around a trillion dollars to finance our debt. But now the Obama administration is counting on China to lend much more – and the Chinese are worried about their investment. On Friday, Chinese Premier Wen Jiabao said: “Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”
President Obama immediately rushed to assure the Chinese that their investment in America is safe: “There’s a reason why even in the midst of this economic crisis you’ve seen actual increases in investment flows here into the United States. I think that not just the Chinese government, but every investor, can have absolute confidence in the soundness of investments in the United States.”
Of course, Beijing’s not worried that the United States government will default on its bonds. Rather, the concern, now being expressed openly for the first time, is that the United States will adopt the time-honored debtor’s remedy of inflating its currency and paying back its debts in shrunken dollars.
Why are the Chinese worried about this? Because Obama’s budget proposes to borrow trillions of dollars, injecting them into the US economy without any offsetting wealth being created. The inevitable result, as just about any economist not in the pay of the Obama administration will tell you, is inflation.
Some experts say the Chinese are stuck (like the bank that you owe a lot of money you can’t pay) – so they shouldn’t talk down the dollar, lest they further devalue the trillion in US debt they already own. But that confidence may be misplaced.
Obama’s budget contemplates that, over the next five years, the federal government will run up more debt than has been incurred during the entire history of the Republic, from George Washington to George Bush. But is anyone willing to lend us the money? The only plausible creditor is China.
With their shot over the bow, the Chinese are telling Obama that they don’t like his budget because they know it will cause inflation. Privately, they’re likely to say that they will lend our government more money only if the Obama administration follows a more responsible fiscal policy, and, in any event, at higher interest rates to compensate for the risk of inflation. Obama likely will have to go along, since there seems no prospect of a Plan B.
Ironically, Americans may be in the position of hoping the “communist” Chinese can impose fiscal discipline on our profligate government.
John Hinderaker writes for the Web site Power Line.