China holds trillions of dollars of American debt, making them our primary creditor. Given that China often takes foreign-policy positions in opposition to our national interests — especially regarding Iran and Taiwan, the latter of which they consider a domestic issue — that relationship has always held a certain amount of peril for our country. Until now, most analysts assumed that China would not do anything to damage its own economy by manipulating the bond market, which would cause them damage, but pressure from the military over the issue of Taiwan could lead to an attack on the American dollar and our financial standing:
Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.
The calls for broad retaliation over the planned U.S. weapons sales to the disputed island came from officers at China’s National Defence University and Academy of Military Sciences, interviewed by Outlook Weekly, a Chinese-language magazine published by the official Xinhua news agency.
The interviews with Major Generals Zhu Chenghu and Luo Yuan and Senior Colonel Ke Chunqiao appeared in the issue published on Monday. …
While far from representing fixed government policy, the open demands for retaliation by the PLA officers underscored the domestic pressures on Beijing to deliver on its threats to punish the Obama administration over the arms sales.
“Our retaliation should not be restricted to merely military matters, and we should adopt a strategic package of counter-punches covering politics, military affairs, diplomacy and economics to treat both the symptoms and root cause of this disease,” said Luo Yuan, a researcher at the Academy of Military Sciences.
“Just like two people rowing a boat, if the United States first throws the strokes into chaos, then so must we.”
As I noted in an earlier post, increasing federal debt isn’t exactly a breaking story. The cumulative spending habits of post-WWII America has landed us in a position where we can no longer choose to retire a significant portion of our outstanding debt. The rise of the welfare state over the last 45 years has put us in a position where our entitlement commitments will easily outstrip all other federal spending and consume perhaps as much as a fifth of our GDP before we get to defense, law enforcement, and other actual explicit duties of the federal government.
Before 1970, the US could have reacted to a threat against our bonds by simply buying them back, levying taxes temporarily to raise funds for that purpose. That’s no longer possible. If a significant creditor sees a political advantage by devaluing our bonds and forcing us to increase interest rates to sell bonds, that nation will do considerable damage to the American dollar and our financial standing. It could get to the point where we have no one left to buy our bonds, while we still must meet interest payments on outstanding paper. And make no mistake: China is in position to do that, if they choose to suffer the short-term consequences of making their paper worthless.
This threat should underscore the need to significantly reduce federal spending and conduct the kind of entitlement reform that greatly reduces our future commitments, not an expensive reform that merely puts a tiny dent in the upward trajectory of future spending. Our financial future relies on action now to reduce our vulnerability, before China or any other creditor can have us stroking into financial chaos.