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Stephen Roach: What The Debt Ceiling Debacle Should Teach China
Authored by Stephen Roach, originally posted at Project Syndicate,
Yes, the United States dodged another bullet with a last-minute deal on the debt ceiling. But, with 90 days left to bridge the ideological and partisan divide before another crisis erupts, the fuse on America’s debt bomb is getting shorter and shorter. As a dysfunctional US government peers into the abyss, China – America’s largest foreign creditor – has much at stake.
It began so innocently. As recently as 2000, China owned only about $60 billion in US Treasuries, or roughly 2% of the outstanding US debt of $3.3 trillion held by the public. But then both countries upped the ante on America’s fiscal profligacy. US debt exploded to nearly $12 trillion ($16.7 trillion if intragovernmental holdings are included). And China’s share of America’s publicly-held debt overhang increased more than five-fold, to nearly 11% ($1.3 trillion) by July 2013. Along with roughly $700 billion in Chinese holdings of US agency debt (Fannie Mae and Freddie Mac), China’s total $2 trillion exposure to US government and quasi-government securities is massive by any standard.
China’s seemingly open-ended purchases of US government debt are at the heart of a web of codependency that binds the two economies. China does not buy Treasuries out of benevolence, or because it looks to America as a shining example of wealth and prosperity. It certainly is not attracted by the return and seemingly riskless security of US government paper – both of which are much in play in an era of zero interest rates and mounting concerns about default. Nor is sympathy at work; China does not buy Treasuries because it wants to temper the pain of America’s fiscal brinkmanship.
China buys Treasuries because they suit its currency policy and the export-led growth that it has relied on over the past 33 years. As a surplus saver, China has run large current-account surpluses since 1994, accumulating a massive portfolio of foreign-exchange reserves that now stands at almost $3.7 trillion.
China has recycled about 60% of these reserves back into dollar-denominated US government securities, because it wants to limit any appreciation of the renminbi against the world’s benchmark currency. If China bought fewer dollars, the renminbi’s exchange rate – up 35% against the dollar since mid-2005 – would strengthen more sharply than it already has, jeopardizing competiveness and export-led growth.
This arrangement fits America’s needs like a glove. Given its extraordinary shortfall of domestic saving, the US runs chronic current-account deficits and relies on foreign investors to fill the funding void. US politicians take this for granted as a special privilege bestowed by the dollar’s position as the world’s major reserve currency. When queried about America’s dependence on foreign lenders, they often smugly retort, “Where else would they go?” I have heard that line many times when I have testified before the US Congress.
Of course, America benefits from China’s outward-facing growth model in many other ways, as well. China’s purchases of Treasuries help hold down US interest rates – possibly by as much as one percentage point – which provides broad support to other asset markets, such as equities and real estate, whose valuation depends to some extent on Chinese-subsidized US interest rates. And, of course, hard-pressed middle-class American consumers benefit hugely from low-cost Chinese imports – the Walmart effect – that enable them to stretch their budgets in an era of unrelenting pressure on jobs and real incomes.
For more than 20 years, this mutually beneficial codependency has served both countries well in compensating for their inherent saving imbalances while satisfying their respective growth agendas. But here the past should not be viewed as prologue. A seismic shift is at hand, and America’s recent fiscal follies may well be the tipping point.
China has made a conscious strategic decision to alter its growth strategy. Its 12th Five-Year Plan, enacted in March 2011, lays out a broad framework for a more balanced growth model that relies increasingly on domestic private consumption. These plans are about to be put into action. An important meeting in November – the Third Plenum of the Central Committee of the 18th Chinese Communist Party Congress – will provide a major test of the new leadership team’s commitment to a detailed agenda of reforms and policies that will be required to achieve this shift.
The debt-ceiling debacle has sent a clear message to China – and comes in conjunction with other warning signs. Post-crisis sluggishness in US aggregate demand – especially consumer demand – is likely to persist, denying Chinese exporters the support they need from their largest foreign market. US-led China bashing – a bipartisan blame game that reached new heights in the 2012 political cycle – remains a real threat. And now the safety and security of US debt are at risk. Economic alarms rarely ring so loudly. The time has come for China to respond with equal clarity.
Rebalancing is China’s only option. Several internal factors – excess resource consumption, environmental degradation, and mounting income inequalities – are calling the old model into question, while a broad constellation of US-centric external forces also attests to the urgent need for realignment.
With rebalancing will come a decline in China’s surplus saving, much slower accumulation of foreign-exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar-denominated assets. Curtailing purchases of US Treasuries is a perfectly logical outgrowth of this process. Long dependent on China to finesse its fiscal problems, America may now have to pay a much steeper price to secure external capital.
Recently, Chinese commentators have provocatively referred to the inevitability of a “de-Americanized world.” For China, this is not a power race. It should be seen as more of a conscious strategy to do what is right for China as it confronts its own daunting growth and development imperatives in the coming years.
The US will find it equally urgent to come to grips with a very different China. Codependency was never a sustainable strategy for either side. China just happens to have understood this first. The days of its open-ended buying of Treasuries will soon come to an end.
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Obama, his followers, and congress should remember this.
We are always hearing about how Social Security is going to run out of money. How come we never hear about Welfare running out of money? Isn't it interesting that the first group 'worked for their money' (pre-paid as did their employers, into a fund for future payouts to elder recipients) -- but the second didn't?Its not the money that will run out, its the purchasing power of that money.
Im sure social security will pay out 1000s , too bad food will cost millions, same with the welfare checks... they wont keep up with inflation its just not gona happen.
honestly, a dollar today is worth more than a dollar 40 years from now, lets be optimistic, a dollar today will probably buy 40~60% more than a dollar in 2050 (if dollars are even still around that long), so what logical sense would it make to defer consumption till then? a date ? that you don't even know if you will live to see?
Personally, SS be damned, gime my cheesburger today, I don't want your 2050 Obama Burger imported from china, its a really bum deal young workers are getting.
for a 20 something year old to pay into social security is a real shame, its a complete waste of money, the money he / she would pay in isn't even going to the older people who payed in before him, that money just goes to the fed who issues more debt to pay the ponzi pipper off and keep him at bay.
You always pay the pipper, one way or another, nominally or through purchasing power loss.
Please, "credit" can be created with the click of a button (gold standard or not) out of thin air.
Unfortunately, you need calories in order to actually do or make anything of real value. There will be no escape from the coming calorie crisis (no matter how many paper or golden promises you have). When that scarcity hits the world, a fucking can of beans will make you a rich man indeed.
But how far away is this day in the future, and given mankinds proclivity for self-deception, how long will those who survive the event be immune from the next big swindle? These are questions none of us can answer.
Re: These are questions none of us can answer.
Yes you can. YOU can answer the question if you weren't reluctant to actually believe what you typed: "and given mankinds proclivity for self-deception"
The next big swindle would be starting as the current big swindle was ending. We've got the only system possible. The smart-n-savvy people manipulating the dumbasses with believable bullshit for fun an profit. Running cons on dumbasses is how the smart-n-savvy eat the dumbasses alive.
Duplicity is nothing but bullshit transmitted into the brains of dumbasses. The dumbasses turn the bullshit into self-delusion (deception).
Bullshit, ask for it by name.
On Aug. 15, 1971, President Nixon announced that the United States would no longer back the dollar with gold reserves. Just a month before, July 15, 1971, the President announced that he would visit the PRC the following year; which he did from February 21 to 28, 1972.
Coincidence, I trust....
Interesting that Roach never even mentions China's re-cycling of dollars into Gold. But, of course, I forgot, he worked for an Investment Bank closely aligned with The Fed.
Chinese couldn't give a damn about the pieces of paper. They got what they wanted: factories, ports, airports, bridges, jobs, market share, know-how.
"They got what they wanted: factories, ports, airports, bridges, jobs, market share, know-how."
And edible air. You forgot Bejing's edible air.
I think we in the U.S. are going to endup like the soviets, bankrupted.
We are playing a game we can no longer afford.
And soviet russia showed us exactly what happens when you play that kind of game for too long.
Collectivism: (where ther rich and corrupt get to collect the wealth of everyone else) is not a good road to be on as a nation.
How long is this line of experts? Its time to change the bloody record Durden.
Re: is not a good road to be on as a nation
No, but in a nation that worships "the rich" and has half the population living off the government, it's kinda tough to change the direction now.
Excellent, when the United States is dissolved, just like the former Soviet Union, any and all debts of that former entity will also be no more.
Fucking bring it!!
Everything you said applies to China too, they too will be broken up like the Soviets.
Socialism is a tool for stripping assets from people that they'd never voluntarily sell.
China is an empty suit being looted by it's managers faster than America.
When our debts go bad their "assets" disappear, and all the power of those "assets" will disappear too, but not the liabilities.
Heads will roll in China.
Re: China is an empty suit being looted by it's managers faster than America.
Tough to know at what speed the looting is taking place, but there are other dynamic besides just looting.
China is as nationalistic as the US. And, the country that's trying to "catch-up" can point to the enemy (in this case: the US) as a motivator to its dumbasses. When the US had the godless commie ruskies as the enemy, the Red and Blue Team dumbasses had a common goal. Hell, the Red Team dumbasses hated the godless commies more than "those people" (which, now , is hard to imagine).
So, when manipulating a society's dumbasses, there are lots of factors in play. The smart-n-savvy do the looting, but they've got to have believable bullshit to deliver to their dumbasses to distract them. The Chinese have the US. All the US has now are a bunch of 3rd world sand-people to hate.
Roach is right about once every ten years, and he's due now, so maybe he's going to be right again. I'm buying silver and don't really give a damn what any politician says.
Fortunately, we only have thirteen more quarters to go...
At the current rate of decline, one has to wonder if we will make it..
It's not looking real good right now, is it?
Why don't we simply adopt the Chinese RMB like other nations are now doing?
Oh, wait.....
Confuscious say : Look like best option is buy up as much USA property as quickly as possible .
Do you mean that they're gonna take away our 'free lunch'.....but, but I don't want to work!!!
I'm calling 555-fed-reserve now!!!!
Steve Roach was right about the financial crisis - only he was bout 6 years early. By the time it finally hit in 2008, he had capitulated and turned bullish on equities. So, I think we're in for at least 5 more years of this fiscal/monetary insanity, then Steve Roach will capitulate and tell us all is good again, then all hell will break loose. He's a great contrarian indicator.
Joe, with all due respect to a fellow ZH'er,
This shit is not going to continue for another five years.
Look to bonds, more importantly look to who is buying all the bonds.
Loaning yourself money at 0% intrest is a great gig while it lasts.
Rolling over they maturity date is even better, it never has to be repaid to yourself.
We are so far into the land of OZ that the yellow brick road is but a dim memory.
Tell yourself what you need to to sleep at night, but reality is a bitch and she's got long pointy teeth, the better to tear your balls off.
When china re-balances, Chinese suppliers' need to export diminishes. This could consequently generate cost-push inflation in the US whether the US consumers like it or not. US Consumers will still be stretched, with high unemployment and stagnant wages. This is how stagflation will ramp up. We will be staring at years of anemic growth and high inflation when that begins. Good Luck Madam Yellen! - you are no Volcker.
Hasn't the value of China's underlying Treasury holdings skyrocketed? From 2009 thru 2012, bond values were surging as rates were going lower. Vanguard's US Treasury Funds' performance was otherworldly.
So is China really a loser here?
Yes - but the value of those bonds drops drop as they get closer to maturity. And new bonds are paying less than inflation... unless you believe we're set for another bull market in US Treasuries? When they're already paying, what, 2.8%?
I've read elsewhere that China is sticking to short maturities, more like 1%.
Why is ANYONE listening to Stephen Roach, one of the scumbag zealots behind the failed BRIC gambit. It would've been nice if mentally masturbating economists like Mr. Roach didn't promote the wholesale export of US wealth for the "greater NWO good". I worked at MS when this pompous prick was there, another Ivy League douchebag who all of sudden is critical(or at least Johnny come lately to the admitting the problems) of policies he help promote and implement. Jeez, I though Greenspan had balls with his new book. Roach takes the cake with this little diatribe of self-absolution.
And maybe Stephie boy should parlez with some of his economist buddies at Brookings. China is part of the US's problem every since we sponsored them in the WTO. If they don't like the US, fucking float your own currency assholes instead of these little token political bilateral swap agreements. Oh, China can't because their populace is starting to get antsy with all the inflation creeping into their lives because their gubmint can't eat it anymore. Gotta love that two book system of the Middle Kingdom. We berate the US for government stupidity(rightfully so), but for some reason when the Chinese go full retard with government stupidity they're branded "brilliant".
China should shut up because at the end of the day, they love the Fed and all the liquidity they provide for their "Master Experiment". There is only Western to Eastern wealth transfer if round eye has credit to buy cheap Chinese shit. The whole "domestic Chinese economy" is a fairy tale. No net world domination when the currency flow doesn't cross the borders.
Excellent. Time to cue Larry Lang < again>
" ALL PROVINCES OF CHINA ARE GREECE "
http://www.worldissues360.com/index.php/comong-chinese-crash-every-province-in-china-is-now-greece-4743/
Sic transit gloria mundi
malo periculosam libertatem quam quietum servitium
malum quo communius eo peius
mea navis aëricumbens anguillis abundat
Outstanding response
Thought they already ended...
T- Isn't there a spell checker on this site? It is amazing that people who comment on this site can't or won't spell correctly. No wonder the site isn't taken seriously. Most of the people who comment are either illiterate or just a product of of bad genetic material...
Stephen Roach must be asleep. The Chinese haven't purchased any additional US Treasury Securities since March. It has already happened.
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/...
And nobody cares. China's vaunted reserves couldn't pay for decent routine medical care for Chinese people for one year. There is no big internal debt to their own Social Security System becasue they don't have a system. Pull the protected layers of Japanese technology from plants the J's built in China, and some US corporate hot money, and China would become a mess. Cut the imports and the shipping lanes if they get too out of hand. It's all rubbish. "You don't like your bonds? Sell them! It's fine with us. Roach. Mr. China. Yep.
Its pretty obvious they ll keep printing money as they cant do anything else... until china says stop. When it happens china will be held responsible, and not the american politicians , megacorp bosses, journalists etc. They dont want to be held responsible and want the hot papato to end in china's hands. Then mass poverty, then after a decade or two, wars, with the rich ones from all countries at the top of the human pyramid, leading the dumbest, poorest ones, against each others...again. When there s no more growth , you have to destroy, to rebuild, and recreate growth. How many times in the past have we seen the exact same scenario happen.
Robotic and 3D printing technology makes China irrelavent. Costs won't move much higher before there is a massive shift onshore. Socialists are trying to avoid this like the plague as it checkkmates Keynesian free and expanding credit sham since 1913. Lower deficits, less credit, equals good deflation and power to the poor, not the parasites.
We can feed and provide the energy we need domestically. That is all that matters for trade deficits.
It's interesting how the spotlight exposing ponzis, corruption, incompetence and hopeless messes dances around the world stage--one week it's on Japan, then on to Europe, next China, over to the rest of the BRICS and finally it hovers over the US--only to start all over again.