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.