The difference between owing $30K and $3 trillion
posted at 10:30 am on February 15, 2009 by Ed Morrissey
Yesterday, when King Banaian, Mitch Berg, and I sat in the Green Room waiting for NARN II to start, I pointed out my post on China’s remarks to both. I especially wanted to get King’s reaction to China’s admission that they had no other option but to stick with US Treasuries, even with the dollar almost certain to depreciate thanks to the enormous debt we’re adding through TARPs and Porkulus. King told me this aphorism:
When you owe the bank $30,000, they own you. When you owe the bank $30 million, you own them.
And if you owe the bank $2 trillion? King elaborates on that today:
Luo is correct that the dollar will depreciate as new debt hits the market. The decline in the dollar will jack up interest rates. China, of course, currently holds $682 billion in U.S. Treasuries, and if the interest rate rises the country will take a bath on those investments. As the old saw goes, when you borrow $30,000 from the bank the bank owns you, but when you owe the bank $30 million, you own the bank. So other China observers are thinking the country needs to get guarantees on U.S. fiscal policy, but Luo lets us know the game is up.
In other words, China has no choice but to help keep the value of the debt up. Otherwise, it risks its own financial collapse. That doesn’t mean that China is powerless, however, and King explains how the Obama administration will be forced to be a lot more laissez-faire on trade than its populist campaign rhetoric promised last year. Be sure to read all of King’s analysis.
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Clinton gave us NAFTA, but only after he got a GOP Congress.
Will Nanny Pelosi & Dingy Harry let BHO be free-trade?
jgapinoy on February 15, 2009 at 10:34 AM
Now is the time for Geithner to start turning the screws on that country.
sethstorm on February 15, 2009 at 10:34 AM
No.
That is when Clinton sold out the country.
sethstorm on February 15, 2009 at 10:36 AM
In case anyone hasn’t noticed, international trade levels are collapsing.
VinceP1974 on February 15, 2009 at 10:37 AM
However, China is currently looking for alternatives – which is something different and a development that people should not take lightly.
Further, once it becomes clear that the US economy is going down, China will have no reason to continue to support us. In fact, in that case, they will have more reason to make their pullout of our market strategic. That will happen within the next year, or so.
progressoverpeace on February 15, 2009 at 10:37 AM
No matter how you put it, it is only a matter of time if this is a total rape of our country or not. Obama lying with his every breath does not look promising. Passing a bill that nobody has read should remove every voter of the bill out of public office. The lemmings are in control and the edge of the cliff is in sight.
volsense on February 15, 2009 at 10:39 AM
The problem with the interest rate rise is it will really hurt the ability of real estate markets to stabilize let alone to recover. And the Chinese holding a ton of US debt are not going to tolerate any misbehavior by the Taiwanese (although I think President Obama would watch Taiwan go under that bus of his without even blinking an eye).
Mr. Joe on February 15, 2009 at 10:39 AM
You mean the US? Oh, you mean China?
Ha – China could crush us if they wanted to. They don’t
because we are there biggest customer. But don’t fool
yourself, they are holding the cards and all we have is
a joker.
izoneguy on February 15, 2009 at 10:43 AM
“Passing a bill that nobody has read…”
Great start Obama and dems. (aka: The art of burning bridges.)
perroviejo on February 15, 2009 at 10:45 AM
China already pulled $550 billion out of the US treasuries market. They did it in something like two hours. It almost destroyed the Chinese economy. But it also almost destroyed the US economy and the entire worlds at the same time. It was a calculated risk on China’s part. Now they are looking for another way to destroy the US economy without taking their own fragile economy at the same time.
doriangrey on February 15, 2009 at 10:45 AM
Exactly. I tried to make that point yesterday and was shot down. The upside for the near future is the leverage China has in keeping protectionism in check.
genso on February 15, 2009 at 10:45 AM
For most people, people still employed, their net-worth has taken a bit hit, but their cash flow is about the same as before. It think once they realize that they’re not going to lose their job anytime soon, they’ll start spending again and slowly drag the economy out of its funk. They’re saving money now, but pretty soon that cash is going to be burning a hole in their pocket.
RBMN on February 15, 2009 at 10:46 AM
Silly, they own the screwdriver.
genso on February 15, 2009 at 10:46 AM
Blacksheep on February 15, 2009 at 10:47 AM
Does Rosetta Stone offer a Mandarin course?
I’m going to look pretty stupid wearing a quilted Mao suit and flip-flops made from old tires.
Bishop on February 15, 2009 at 10:47 AM
Sethstorm, you really think Geithner is going to turn the screws on China? The man can’t even turn in his taxes correctly
Chuck Schick on February 15, 2009 at 10:48 AM
The problem occurs when inflation sets in and their current dollars won’t buy the same things. Then spending will contract. Prices are already rising.
genso on February 15, 2009 at 10:48 AM
How profound is that!
The Chi-coms will turn the screws on us. What was not said is that right now is the chance to buy controlling interest in the dollar.
conservnut on February 15, 2009 at 10:49 AM
It’s a sad day when the American administration worries about how another country feels about debasing the currency, but doesn’t give a damn how the Am. people feel about it.
JiangxiDad on February 15, 2009 at 10:50 AM
Please elaborate.
genso on February 15, 2009 at 10:50 AM
As I commented in your last China post, it’s all funny money — fiat currency stuff. China can certainly sell off their Treasuries, or change dollars for Euros, but (again) it’s a gun with a barrel that points at the wielder.
They have to sell at a discount (do dumping) if they want to exit the US securities marketplace, and the new owners are as powerless as the Chinese.
It’s not like they are an investor like Soros and able to sell short in some arcane derivative market — they are a government, and they are dealing with Treasuries — something the US can make worthless at the stroke of a pen.
unclesmrgol on February 15, 2009 at 10:50 AM
RBMN on February 15, 2009 at 10:46 AM
They would be the dumb ones.
I’m not buying jack beyond the normal ammo expenditures which are the equal of my wife’s weekly visits to her nail lady.
I told my workers that they should prepare accordingly and be smart about their finances, that I would give them as much notice as possible if the Obama starts hitting the fan. They’re all young guys and enjoy blowing their cash, but the warning has been given.
Bishop on February 15, 2009 at 10:52 AM
China has gone from great power, to debauchery, to serfdom, to civil war, to holocaust, to great power in the span of about 200 years. (So there’s hope for us yet. We’re just entering serfdom, I would guess.)
JiangxiDad on February 15, 2009 at 10:54 AM
The administration is playing a dangerous game of wanting to trash the economy enough to install a “fair” economy yet still keep it from totally collapsing. I don’t think they can maintain that balance.
genso on February 15, 2009 at 10:54 AM
If his first month in office is any indication, the Thin Resume promises to ‘think globally, act stupidly.’
whitetop on February 15, 2009 at 10:55 AM
I think as long as we stop any foolish protectionism dead in its tracks, and borrow the money rather than print it, then I don’t see the ingredients for inflation. Protectionism is what could really fuel inflation.
RBMN on February 15, 2009 at 10:57 AM
It may take a full blown financial collapse to force a revolution.
We truly need a renaissance.
I say (swallows hard) bring it on.
Let’s get it over with.
artist on February 15, 2009 at 10:57 AM
That’s what I see too. The question is if it tanks, can they capitalize on the chaos, or do they risk overthrow? Stay tuned.
JiangxiDad on February 15, 2009 at 10:57 AM
One country is getting royally screwed by the Obama regime, it’s not china.
the_nile on February 15, 2009 at 10:57 AM
Good link dorian. Check this out folks.
Now the only reason that they did not continue the run is because the accounts were shut down. We always assume that the Chi-coms would not do this because it would destroy their economy as well. But I wonder sometimes what forces are really at work over there.
conservnut on February 15, 2009 at 10:58 AM
Actually, they can’t sell all of the debt overseas so they have a plan to purchase their own treasuries. Net effect, printing money.
genso on February 15, 2009 at 10:58 AM
Yeah, that one always gives me the giggles.
JiangxiDad on February 15, 2009 at 11:00 AM
Kind of sounds like Soros. There was also the trend, prior to the election, of major market sell-offs in the last 15 minutes of trading thus keeping the market depressed.
genso on February 15, 2009 at 11:00 AM
Does Rosetta Stone offer a Mandarin course?
I’m going to look pretty stupid wearing a quilted Mao suit and flip-flops made from old tires.
Bishop on February 15, 2009 at 10:47 AM
How are you at bowing?
anniekc on February 15, 2009 at 11:01 AM
Don’t worry. The weight of the debt around your neck will help.
JiangxiDad on February 15, 2009 at 11:02 AM
Correct me if I’m wrong, but the Japanese bow and the Chinese shake hands with a bit of a head bob.
genso on February 15, 2009 at 11:04 AM
It’s the kind of thing Soros’ would do if he could pull it off, but in fact it is way beyond his abilities. Only China had the capability to pull something this enormous off.
doriangrey on February 15, 2009 at 11:05 AM
I have a pond in my backyard, I suppose I could convert that to a rice paddy.
Bishop on February 15, 2009 at 11:05 AM
And the US has no choice but to keep the value of the debt down. i.e. pay it back in inflated dollars, like we do our mortgages.
JiangxiDad on February 15, 2009 at 11:05 AM
I don’t see the upside for China to destroy our economy now.
genso on February 15, 2009 at 11:06 AM
I’m no expert, but I think the bow is pretty much pre-Mao.
JiangxiDad on February 15, 2009 at 11:07 AM
How are you at bowing?
anniekc on February 15, 2009 at 11:01 AM
The wounds I suffered in the Spanish-American war preclude me from bowing, I’ll just have to tell them to get stuffed instead.
Bishop on February 15, 2009 at 11:07 AM
That was my experience. No more offering the neck to the sword.
genso on February 15, 2009 at 11:08 AM
Correct me if I’m wrong, but the Japanese bow and the Chinese shake hands with a bit of a head bob.
genso on February 15, 2009 at 11:04 AM
Guess I better get myself down to Barnes and Noble for a “Dummy’s guide to Chinese submission”
anniekc on February 15, 2009 at 11:08 AM
I was surprised but relieved to hear King say yesterday on his radio show that the US debt was nowhere close to its breaking point. He suggested that the debt could bear much more before it reached the point where it would be mathematically impossible to retire.
I was so encouraged by that comment! Maybe we can dig ourselves out of this after all. We just might make it.
King is a good man and very smart.
jeff_from_mpls on February 15, 2009 at 11:10 AM
Or how to get into China. They may come out of this better than us and they are certainly moving in a better direction than we are.
genso on February 15, 2009 at 11:10 AM
Correct, bowing is common in Japan but not China anymore.
DarkCurrent on February 15, 2009 at 11:10 AM
No, turn the screws on China.
sethstorm on February 15, 2009 at 11:11 AM
Believe me, if we defaulted on our debt, our dollar would be instantaneously worthless.
China would survive, but we wouldn’t.
TexasJew on February 15, 2009 at 11:11 AM
Ah…our resident expert. Nothing like a good China/economy thread to get you here, Dark.
genso on February 15, 2009 at 11:11 AM
jeff_from_mpls on February 15, 2009 at 11:10 AM
If true, that will be bad news, the ‘rats will use it as an excuse to inflict America with TARP’s II through X and never-ending Disastrulous Bill’s.
Bishop on February 15, 2009 at 11:14 AM
Yes, but. As in your own life, debt is good for some purposes (house, education, start a business) and at some particular times in life. (I cringed when I heard of 60 year olds getting 30 year mortgages.)
So you’re right. Our debt will be similar to WWII levels. But what will we get for the spending? Will the result set us on the path to be able to repay (like graduating and getting a good job) or are we the 60 year-old applying for the 30 year mortgage?
JiangxiDad on February 15, 2009 at 11:15 AM
zao
JiangxiDad on February 15, 2009 at 11:16 AM
It’s almost bed time ;-)
DarkCurrent on February 15, 2009 at 11:17 AM
wan an
JiangxiDad on February 15, 2009 at 11:18 AM
The Chinese are not stupid, they are in fact very intelligent. After the first Gulf War the United States proved that at this time in human history America fields the most powerful and effective military on the face of the earth. The Chinese very correctly recognized that a military conflict with America would not resolve in their favor. In order for China to expand it’s sphere of influence they had to find a non military strategy that would cripple America. It seems that they chose a variation on Ronald Reagan’s strategy for defeating the old Soviet Union.
China couldn’t out spend us as Ronald Reagan did the Soviet Union, so they spent a decade buying our debt and called those notes due in a single hour. They miscalculated the outcome and underestimated the strength of the US economy. Now they words of the Gipper may very well come back to bite China in the ass…
Today we did what we had to do. They counted on America to be passive. They counted wrong.
doriangrey on February 15, 2009 at 11:18 AM
A great point made by the Great One (Mark Levin, not B. Milhous Obama):
Glenn Jericho on February 15, 2009 at 11:19 AM
DarkCurrent, I wanted to ask you something. Are you allowed, as a foreigner, to invest in the Shanghai stock exchange?
genso on February 15, 2009 at 11:19 AM
I dare say you have no clue about what you suggest.
You can’t turn the screws on China. They have tremendous raw feedstock to manufacture the exports we and the rest of the world consume. They are communist so they are skilled at providing for their people – even if the door to trade is closed – and did so for more than 4 decades.
You put the screws to China and you shoot yourself in the back at the same time. Get off the sofa for an hour today and go to
Walmart Kmart Sears Target Macy’s Dillard’sNieman Marcus and start looking for stuff that wasn’t a raw material or commodity or a manufactured product from China. Go to work tomorrow and start counting all the stuff you use that didn’t have some origination in China.Toying with any idea of stemming China is foolish. You can’t imagine the grip they have on trade. If you want a glimpse, take a gander at the names of most of the ocean going freighters, but more importantly and to the point, realize that Shanghai is the largest cargo port in the world. Cutting back China would be the deathblow to the US’s economic machine.
ericdijon on February 15, 2009 at 11:20 AM
That’s very funny. I was looking for a graduation gift to send the daughter of a friend in China and had a hard time finding something not made in China within a certain price range.
genso on February 15, 2009 at 11:22 AM
I don’t think so, but haven’t really looked into it.
DarkCurrent on February 15, 2009 at 11:23 AM
In Japan it seems it is a contest. In China, (IMO) it depends on how far to the west you travel.
ericdijon on February 15, 2009 at 11:27 AM
I suspect you do not see the upside because you think like a capitalist not like a fascist Maoist. Capitalists look for profit, totalitarians look for physical control.
The Chinese do not need the worlds economy to survive, but they cannot expand their sphere of influence against opposition that can sustain a prolonged military resistance against them.
If China can crash the worlds economy then those forces currently capable of sustaining a prolonged military resistance against their aggressions would loose that ability. China would not loose that ability. Hence their capacity to see a profit in collapsing the US and the worlds economies.
doriangrey on February 15, 2009 at 11:30 AM
I know the trouble. I live in the Dallas area and have guests from around the world visit. I like to find different Texas and American type gifts to offer them on their arrival or departure as mementoes. It is a difficult task to find something that is domestically produced.
ericdijon on February 15, 2009 at 11:32 AM
Any dizziness you may feel is undoubtedly caused by the coriolis effect as America circles the drain. Years of neglect, letting special interests and self-serving politicians play with the toilet handle has culminated here with the stimulus packsge and like a Disney water ride, now all that’s left is enjoying that wild trip down the pipe and all that stink at the bottom. WHEEE…..
Ernest on February 15, 2009 at 11:32 AM
If China can crash the worlds economy then those forces currently capable of sustaining a prolonged military resistance against their aggressions would loose that ability. China would not loose that ability. Hence their capacity to see a profit in collapsing the US and the worlds economies.
doriangrey on February 15, 2009 at 11:30 AM
genso on February 15, 2009 at 11:36 AM
Do you mean people in western China bow commonly? I haven’t noticed that, but I’ve only traveled as far west as Sichuan.
DarkCurrent on February 15, 2009 at 11:36 AM
I was lockstep with you up that sentence. You need a trading partner to realize a profit.
ericdijon on February 15, 2009 at 11:39 AM
Haven’t seen you in a while, you intellectual fraud.
In the middle of the threads about Obama’s tax-cheating nominees, you repeatedly shrieked something about Republican problems relating to tax havens. Ignoring that your comments were completely irrelevant to the tax-cheating of people then under consideration for cabinet appointments, you provided no links to any credible discussion regarding whatever point in hell that you were trying to make.
Stay off the threads if all that you can do is act like a seagull by flying in, taking a dump, and flying away. You fraud.
BuckeyeSam on February 15, 2009 at 11:40 AM
I don’t buy that. China today is very heavily dependent on foreign trade. If the world economy truly tanks, China’s recent economic success collapses. There would be massive unrest and the fate of the ruling party would be very much in jeopardy. I think they’re smart enough to understand that.
DarkCurrent on February 15, 2009 at 11:42 AM
You assume that China’s dalliance with capitalism is anything other than a Sun Tzu tactic. I presume that it is exactly that, a strategic tactic to be used and abandoned when when the goal behind it’s employ is achieved.
doriangrey on February 15, 2009 at 11:43 AM
I defer to DarkCurrent. Once you unleash capitalism and raise the standard of living for so many who have lived miserable lives for generations, its hard to get that genie back in the bottle. Unless, that is, you have an apathetic citizenry like we apparently have here.
genso on February 15, 2009 at 11:45 AM
It’s all in the definition of the word “profit”. To the Chinese profit means physical control. It does not mean trading partners or cash money.
doriangrey on February 15, 2009 at 11:46 AM
The more reason to start turning the screws on them.
sethstorm on February 15, 2009 at 11:49 AM
OK….tell us your plan to do that.
genso on February 15, 2009 at 11:50 AM
dorian, if you haven’t you should come over and take a look at the scale of capitalism in the major urban areas. There’s no turning it back without triggering a truly massive backlash.
DarkCurrent on February 15, 2009 at 11:52 AM
You and DarkCurrent underestimate the ruthless nature of the Chinese state organ. They have no god whom they must answer to for their actions, consequently there are no limits they are constrained by in maintaining the power of the state. Their emerging middle class is nothing less than a Potemkin village for the rest of the world to see. They can and will crush it mercilessly if and when it ceases to serve it’s purpose.
doriangrey on February 15, 2009 at 11:52 AM
You know this how? I’m living in the village… it looks pretty real to me.
DarkCurrent on February 15, 2009 at 11:53 AM
They have 1.3 billion people excited about a better life with a memory of the sacrifice they would have to make to return to the “good old days” of a closed society.
genso on February 15, 2009 at 11:54 AM
I am fully aware of the scope of capitalism within China. I obtained my Bachelors Degree (in Music if it matters) at the United States International University in 1986.
I spent a rather considerable amount of time engaging in political debate with a group of Chinese students. I believe that those debates have given me a pretty good amount of insight into Chinese political ideology.
Believing that capitalism is capable of dictating the course of Chinese political ideology would be a fatal mistake.
doriangrey on February 15, 2009 at 11:58 AM
It depends on many things I think. I’m more than six foot tall, 240, and quite Scandinavian (for an American) and that typically gets me a different reception than most other folks. You also have to consider how westernized the district is you are visiting and how western-styled your encounter is. My associates in the Sichuan province switch between Hong Kong and Shanghai and pure Chinese tactics freely. In the north of Beijing and behind the Bund in Shanghai, I can realize and become immersed textbook China.
ericdijon on February 15, 2009 at 12:00 PM
Looks can be very deceptive especially to those with short memories. Tiananmen Square was not an aberration.
doriangrey on February 15, 2009 at 12:02 PM
A lot has changed in 23 years. I have a friend who is in the CCP and who is also fully engaged in capitalism. The thought of losing the ability to make money and provide for himself and his family is abhorrent to him.
genso on February 15, 2009 at 12:02 PM
I don’t know about 1986 – my first visit here was in 1991. It isn’t anything like it was then and presumably even less than like it was 1986.
DarkCurrent on February 15, 2009 at 12:05 PM
And 100 million armed soldiers who would shoot their own mothers and children on orders from the party. Make no mistake about it China’s embrace of capitalism is strictly for show and when it no longer servers the parties purposes anyone who objects will get a bullet in the head and the bill for that bullet will be sent to their family.
doriangrey on February 15, 2009 at 12:06 PM
What has not changed is the party. It is still controlled by the exact same hard line Maoists.
doriangrey on February 15, 2009 at 12:08 PM
The US dollar is clearly being propped up on currency markets, because Europe, China and the Saudis will suffer on a collapse — the borrowing needed for Porkulus and Tarp2 just adds to the problem of supporting the dollar. Glenn Beck predicts that the US Treasury may skip the borrowing step and just print the money. It looks like a bad dream is going on right now, with a horrific nightmare to follow — will we see Americans buying loaves of bread with wheel barrels of cash?
Mark30339 on February 15, 2009 at 12:08 PM
i.e put a Mafioso in a ten thousand dollar suit and you still have a Mafioso.
doriangrey on February 15, 2009 at 12:10 PM
Tiananmen was 20 years ago. Capitalism and the resulting increases in standard of living and future expectations have taken firm root since then. Chinese are practical people, that includes the party. Suppressing capitalism at this point is much more dangerous than the alternative of letting it continue to grow.
Btw, who do you think were the Chinese who got to attend the United States International University in 1986? Most likely all family of loyal party members. Your sample population is suspect.
DarkCurrent on February 15, 2009 at 12:11 PM
You had the same textbook I had in 1966.
ericdijon on February 15, 2009 at 12:11 PM
Inflation is my concern as well. I am fortunate in that I have enough money to survive a recession and a down market, but it does me no good if the dollar is destroyed. The thing is, I don’t have a clear idea on where to find a safe haven. I leery of gold mostly due to the fact that FDR confiscated gold in 1933 and this administration seems to be on the same tract as FDR in so many other ways I think the risk in gold is too great.
genso on February 15, 2009 at 12:13 PM
That may well be, but if he’s a smart Mafioso he’ll get a clue that the neighborhood has changed and the old way of doing things won’t work out the same anymore.
DarkCurrent on February 15, 2009 at 12:13 PM
The people of this country would be fortunate to have the same spirit as the Chinese people as we watch our country decline.
genso on February 15, 2009 at 12:16 PM
I’m with dorian on this one. I have always believed that the rise of capitalism (or their version of it) in China has always just been a means to an end.
And they can crush any resulting uprising quickly and violently.
conservnut on February 15, 2009 at 12:17 PM
I would think the CCP would be more concerned about the instability posed by Putin than trying to destroy the consumer engine of their growing wealth.
genso on February 15, 2009 at 12:19 PM
You clearly have no understanding of Chinese culture. If you believe this statement you really shouldn’t be posting about anything related to China.
DarkCurrent on February 15, 2009 at 12:20 PM
For those of you looking for a gift for a foreigner, think of this if they smoke tobacco, even a pipe. A Zippo lighter. I recently sent one of mine that was a gift in 1970 to their repair center; it came back about three weeks later perfectly repaired and no charge.
Pelayo on February 15, 2009 at 12:22 PM
Why? If their ploy back in September had worked, Russia would be economically destroyed as well.
conservnut on February 15, 2009 at 12:24 PM
Excellent….I hadn’t though of that. Thanks.
genso on February 15, 2009 at 12:24 PM
China isn’t going to be able to take down our economy anytime soon.
Every action they take hurts them, it just won’t happen (soon).
http://www.foreignpolicy.com/story/cms.php?story_id=4692
I think we need to worry about the long run, though. The Chinese are immensely more patient than we are. Sadly, our government acts based on the next election cycle. The driving force behind most in Washington D.C. is getting re-elected, the future of the country is not important.
China will continue to chip away, looking decades down the road, while our idiots in DC posture for the cameras, build up their campaign coffers, and build phony legacies. It’s campaign mode 24/7, 365.
It is truly sickening.
reaganaut on February 15, 2009 at 12:25 PM
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