03/04/10 Stockholm, Sweden – Providing the world’s reserve currency has its privileges. Not the least of which is the continued willingness of foreigners to soak up the massive amounts of debt issued by the US despite the nation’s continued debasement of the dollar.
Yet, what if the foreign nations stopped buying? We’ve certainly heard of the calamity that should result from China cutting the US off, but perhaps we shouldn’t be so certain that’s the case.
Let’s suppose for a minute that it’s not. Mike Cosgrove investigates an eye-opening upside of a US without a market for its debt.
From Investor’s Business Daily:
“The Chinese and Japanese are our friends for two reasons: (1) Their net purchases help keep bond yields low, and (2) Chinese warnings about not buying more Treasuries or in fact selling Treasuries can send shock waves through capital markets.
“Congress and the Obama administration don’t seem overly concerned with huge federal deficits. But the administration does understand the crisis that would be created in capital markets were the Chinese to become net Treasury sellers, even for a short period of time.
“The Chinese can act as a constraint on the reckless federal spending of Congress and the administration. In fact, the Chinese may be the only realistic constraint in 2010…
“…The Chinese can lecture the administration about excessive federal outlays, but nothing would be more effective than dumping Treasuries, even for a short time. Such action would panic investors, and as a result the administration may well agree to constrain spending to placate the Chinese.”
In the scenario Cosgrove plays out, China has the potential to act like a caring relative who, familiar with the Alcoholics Anonymous process, is ready to perform an intervention. It’s hardly a painless process, but perhaps the US debt market needs to hit rock bottom before the administration will walk the road to recovery.
You can read more about Cosgrove’s theory in an Investors.com editorial on why the Chinese can’t dump our debt too soon.
Best,
Rocky Vega,
The Daily Reckoning
Rocky Vega
Rocky Vega is publisher of The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.
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Well, ahem, unfortunately it’s not quite as simple as Mr. Cosgrove would hope. Has he ever heard of the DT’s with alcoholics?
Now take that image and metaphorically superimpose it over a nation that depends on credit to function such as the U.S. It isn’t the ‘DT’s’ anymore in this case. It’s flat out cardiac arrest and flat lines. The patient is now dead thank you very much. And oh btw wait till the corpse starts to rot and stinks up the rest of the ward. That will be one hell of a hospital. Yeah, that’ll work.
Any other ‘brilliant’ opinions by simplistic authors?
RH
We are flat lined and most know it and love to pretend it isn’t so.
Like .99cents is so much lower than $1.00. Pitiful
This opinion is brilliant in its simplicity “RH”. The fundamental flaw of any economic theory is failure to predict future behavior. This is uncharted territory! There has never been a nation that owed this amount of debt, and no one truly knows what will happen, only speculation and opinion.
The Chinese and Japanese are not buying US treasuries to be our friends, they are doing it to keep their currencies artificially low and continue their export driven growth. Dumping U.S. treasuries would in the short-term be a disaster for the U.S.; layoffs would multiply with cutbacks in government spending, but in the long-term would push the dollar down and spur exports which in turn would spur a return of the U.S. manufacturing base (and loss for China and Japan). That is why they won’t dump treasuries, because it benefits them more to continue buying.
As for being a 99 cent Nation, go and spend some time in China or elsewhere in Asia. The quality of life that we have is still multiples better than most of Asia, and we won’t lose that even if all the foreign countries dump U.S. treasuries.
“…….would in the short-term be a disaster for the U.S.; layoffs would multiply with cutbacks in government spending, but in the long-term would push the dollar down and spur exports which in turn would spur a return of the U.S. manufacturing base (and loss for China and Japan).”
Therein lies the problem with this short-term assumption. With the state of our debt load and the amount of printing this is more than wishful thinking that our manufacturing/export base would bounce right back in the nick of time to take advantage of said low dollar.
Let me make this even clearer: China and Japan have us by the short hairs here short-term, mid-term and long-term. You can call it by what you’d like but in my book it’s as good as a nuclear option to the economy of the U.S. if they play this kind of hardball.
We are not today prepared structurally to handle it. Not anymore. We are Weimar on the brink. And we won’t be able to handle it for a long, long, time if ever again. We’ve screwed the pooch.
RH