Dear China, I.O.U. Regards, USA

Thursday, November 20, 2008

Read the article below...
And people really want an "economic stimulus plans" round 2? What good did that do?

And the "Big 3" (who are hurting so bad, they flew to DC to beg for money in private jets) want a bail out?

And the folks at AIG are overdue for facials and pedicures?

And we have a $700 billion bail out in progress?

In a nation with a bad case of the "gimme's" we really need to open our eyes. It appears from the article below that Communist China has us in a headlock. Oh, but lets focus on making more environmental laws, increase taxes on corporations and spending like, well, Congress (I would have said drunken sailors but would hate to insult the sailors). If companies can lower the price of their products (preferably without cutting jobs) and if the American people have more of their OWN hard earned money in their pockets (regardless of how rich or poor they are), well, we'll still be in one hell of a pickle, but at least there maybe light at the end of the tunnel!

(Obviously I'm not so shortsighted to believe that these 2 items would magically solve the current economic situation, nor do I actually believe it is feasible that the US will pay off this debt in the next century, I just wanted to illustrate my point succinctly.)

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/18/AR2008111803558.html

China Tops Japan in U.S. Debt Holdings
Beijing Gains Sway Over U.S. Economy

By Anthony Faiola and Zachary A. Goldfarb

Washington Post Staff Writers
Wednesday, November 19, 2008; Page D01

China passed Japan to become the U.S. government's largest foreign creditor in September, the Treasury Department announced yesterday, reflecting the dramatic expansion of Beijing's economic influence over the American economy.

China's new status -- it now owns nearly $1 out of every $10 in U.S. public debt -- means Washington will be increasingly forced to rely on Beijing as it seeks to raise money to cover the cost of a $700 billion bailout. China, in fact, may be the government's largest creditor, period. The Treasury does not keep records on domestic bond holders. But analysts said China's holdings are so vast that the existence of a larger stakeholder in the United States now seems unlikely.

The growing dependence on Chinese cash is granting Beijing extraordinary sway over the U.S. economy. Analysts say a decision by China to move out of U.S. government bonds, for economic or political reasons, could lead a herd of other investors to follow suit. That would drive up the cost of U.S. borrowing, jeopardizing Washington's ability to fund, among other things, a stimulus package to jump-start the economy. If China were to stop buying or, worse, start selling U.S. debt, it would also quickly raise interest rates on a variety of loans in the United States, analysts say.

Additionally, the more China invests in U.S. debt, the harder it becomes for U.S. companies to sell their products overseas. That's because China's purchase of U.S. bonds makes the dollar stronger, particularly against the Chinese yuan, which has been kept artificially weak to boost Chinese exports. The relatively weak yuan remains one of the biggest obstacles to U.S. companies tapping the market in China, particularly lucrative now as Beijing embarks on $586 billion in infrastructure and other stimulus spending to keep its economy humming amid the global crisis.

In the United States, Chinese influence is reflected in terms as basic as home mortgage rates. Since the U.S. government seized Fannie Mae and Freddie Mac in September, China, which maintains the world's largest cash reserves of roughly $1.9 trillion, has shed about $50 billion in the companies' debt and mortgage bonds, according to people who track the data. With China shying away from buying more, Fannie Mae and Freddie Mac have had to pay more to borrow and have gotten less for mortgage bonds, pushing up rates for people seeking home loans just as the U.S. government is trying to bring them down.

"This is a sign of the growing interdependence between the Chinese and U.S. economies, but also a sign of a relationship that is not healthy in the long term," said Eswar Prasad, an economics professor at Cornell University and a senior fellow at the Brookings Institution in Washington. "There are inconsistent policies on both sides of the Pacific that are working against a more flexible Chinese exchange rate and the reduction of China's large trade surplus. This is a problem for the United States."

In good times, U.S. companies tapped China as a bargain-basement manufacturing hub, helping lift hundreds of millions of Chinese out of poverty. But China's torrid growth has also caused severe environmental damage from a rapid rise in pollution and industrial waste, even as it improved American lifestyles by putting cheaper televisions and microwave ovens within easier reach for consumers. In recent years, Chinese cash also became part of a massive surge in foreign capital to the United States that brought down interest rates and eased the credit terms that American financial institutions charged.

Now, in bad times, China is effectively co-financing the $1 trillion annual U.S. deficit and massive government bailout of the financial system. It is doing so in part with money earned from exports to the United States, which last year imported five times as much as it exported to China.

The surge in Chinese buying is part of a rush by panicked investors into U.S. Treasurys, an indication that lending to the U.S. government is still seen as among the safest investments in uncertain times.

"It is occurring in an environment where global investment prospects are less enticing," said Lawrence Goodman, head of emerging market strategy at Bank of America. "There is a movement for foreigners to seek safer haven investments like Treasurys versus more risk-oriented foreign investments."

China's investment in U.S. Treasury bonds surged by $43.6 billion to $585 billion in September, pulling ahead of the Japan, which now holds $573.2 billion worth. Overall, analysts say China's holdings may be $800 billion or more. China is thought to be purchasing U.S. debt through third countries, purchases that are not immediately recorded by the Treasury as being held by China, analysts say.

In contrast to Japan, one of the United States' closest allies, China is seen as less benevolent to U.S. interests.

Many economists are concerned about U.S. reliance on China for funding. By buying Treasury bonds, which are denominated in dollars, China is able to keep the dollar strong compared with the yuan. As a result, Chinese exports are cheaper relative to U.S. exports.

That is a friction point at a time when the United States needs manufacturing companies to be competitive in the global marketplace to combat the economic downturn. U.S. labor unions are already pushing the incoming Obama administration to urge the Chinese to take steps to strengthen the yuan, which could involve a broad sell-off by China of U.S. Treasury bonds.

"This is an unhealthy relationship," said Brad W. Setser, geoeconomics fellow at the Council on Foreign Relations. "The U.S. relies too heavily on subsidized financing from a non-democratic government. And China is still a poor country that has in turn invested too much of its national savings in the United States. There remains an underlying financial vulnerability if China were to scale back its purchases. It could deliver a shock to the United States."