For a while there, I was just about ready to completely give up on Peggy Noonan. I think she had spent too many years flying around defending George W. Bush. After Harriet Myers, Comprehensive Immigration Reform, Iraq and Katrina, it may well have been that her arms had gotten tired. Today, she offered further indications that she had reacquired her groove. She may not miss Poor, Old George quite yet; but she has seemed to realize those signals emanating from her brain might be worth paying attention to.
Today she focused on the impact of debt. This debt is the debt that results from spending “stimulus” funds that do not reside in your treasury. Liberals will tell you it’s not the spending, it’s the revenue. I suppose they expect me to believe that most years taxpayers just luvvs them some IRS, and gladly open their wallets for Handi-Vaccing. No, the revenue didn’t just capriciously disappear. Regardless of causal vector, Noonan probes some possible consequences of this newly-minted indebtedness.
People are freshly aware and concerned about the real-world implications of a $1.6 trillion dollar deficit, of a $14 trillion debt. It will rob America of its economic power, and eventually even of its ability to defend itself. Militaries cost money. And if other countries own our debt, don’t they in some new way own us? If China holds enough of your paper, does it also own some of your foreign policy? Do we want to find out? And there are the moral implications of the debt, which have so roused the tea party movement: The old vote themselves benefits that their children will have to pay for. What kind of a people do that? (HT: Wall Street Journal)
All of these questions are exceptionally prescient and well-framed. I particularly appreciate that she has reacquired her bearings enough to understand the legitimate concerns of the Tea Party Movement. But what really piqued my curiosity here was her question about China. This stuff is fascinating in a Machiavellian sort of a way.
Does China hold the mortgage on our butts like Guido The Killer Pimp from Risky Business? We owe them $2T, and that’s just to par the bonds they already hold. If we just withdrew $2T from some imaginary ATM, we could make China go away to the other side of the world.
However, if we don’t have that $2T sitting around in a few non-descript briefcases, the interest costs extra. As loan sharks say in the alley, the juice is running. At a recent Treasury Auction, America’s credit rating made like the British Army at The battle of New Orleans, and bravely ran away. That juice just got more expensive. The yield on your standard 10 year T-Bill is backing up like a cornered hedgehog.
It would seem like the Chinese could really stick it to us hard right now by buying T-Bills. They could buy lots of T-Bills, and lock us into transferring American wealth to Chinese bond-holders for the next decade. Even better, it would make us have to sell them more bonds to cover the interest on the bonds they hold.
Logic would dictate that these new bonds would veer closer to junk status and thereby require a significantly higher coupon rate. China could not only be the pimp, they could also serve as the Candy-Man to a cash-starved America; desperately A-Jonesin’ for that next liquid fix.
But here’s where the logic set out above gets laid to nines by capricious reality. The Chinese have decided to sell. The reason we can’t sell the treasuries, to capitalize the stimulus, to create the meaningful jobs, in the non-existent zip codes; like Joe Biden typically would, is because the Chinese grow tired of having us on their Vig. They don’t want our paper. The pusher has decided to pull back instead. But why?
The facile interpretation for this divestiture centers around Chinese anger over recent US military sales to Taiwan. Ranking members of the PLA are quite mad about this. They have been for decades. They usually resolve this anger through their continued baby-sitting of the dyspeptic and dysfunctional Kim Dynasty in North Korea.
This betrays their stated goal to have us out of the regions near The South China Sea. We respond by buttressing South Korea and Japan while selling still more to Taiwan. The Chinese possess the intellectual perspicacity to grasp that supporting Asia’s depressing riposte to Robert Mugabe will tie America down in East Asia. It will not send us packing for Cali like they claim to desire. It’s almost like they’ve decided to keep us around in oblique apposition to the official rhetoric of the officially communist state.
So why ditch the T-Bills? My counterintuitive theory hinges on a different emotion than childish anger – it involves mordant fear.
So imagine you’re tasked with managing the Chinese international investment portfolio. You’re like much of the rest of the world and have gotten pretty close to addicted when it comes to using US Long Bonds as a back-stop. The T-Bills balance whatever risks you take in developing countries with precious natural resources.
You take the flyer on the Zimbabwean Chromium Mine, but you straddle and balance that risk with Uncle Sugar Daddy’s T-Bills. This also ratchets down your inflationary fears by rapidly sending excess cash abroad before your food, medicine and fuel become unaffordable to your lumpen-proletariat.
So what happens if Sam’s Treasury begins to issue junk? Let’s say there is actually a consistent upward time-series regression in US CDS insurance? Your Butterfly Straddles could be in danger of losing a wing. But you’ve spotted this problem in time. If you move fast enough, you can get out from under before you cause your national economy to end up like the condo market in Jupiter, Florida.
So the Chinese sell. This sparks panic in the Streets of London and Morrissey suggests the idea that we should Hang the DJ. But this would be irresponsible, and not very conducive to the local music scene. Instead, our leaders need to figure out what has China on edge. If they don’t want to do that, they can figure out what to do if China no longer wants to be a US Treasury customer.
GOP Congressman Paul Ryan perhaps already has. We must put our national apettites on a logical glide path towards sustainable straight and level flight. If we can’t sell the bonds, and nobody has a job to pay the taxes, we can’t spend the money, to fuel the Keynesian Stimulus, that blows through our national wealth the way Dirk Diggler went through the nose candy in Boogie Nights.
What the Chinese reluctance to continue financing American debt should tell our leaders is the same thing a rotten credit score should tell a consumer. We spend too much, produce too little, and haven’t given the consequences even oblique thought until the Visa Bill showed up in the mailbox. Now the time has come to embrace the suck and enjoy eating lots of Ramen Pride Noodles for a while. At least then, we’d have more things in common with our erstwhile trading partners in China.
X-Posted At: THE MINORITY REPORT