Much has been written on the farcical, last-minute deal made in Washington between Democrats and Republicans over raising the U.S. debt ceiling, allowing America to borrow more money to pay its bills. I’d like to focus narrowly on post-deal Chinese criticisms of the deal because folks over here have either bought into the manufactured debt “crisis” or are complaining about it purely as a tactical move.
OK, keep in mind that China owns a shitload of dollar assets and, like any creditor, is first and foremost concerned about protecting its investment. Therefore an out-of-control U.S. budget deficit is a genuine source of concern, since an ever-larger U.S. government debt could end up causing problems for the dollar and devaluing China’s investments.
China was of course even more concerned with the possibility of the U.S. either defaulting on its obligations or acting so stupidly that its credit rating would be knocked down a peg (the latter could still happen).
With the deal that was cobbled together at the last minute, the default problem has gone away for the moment, and everyone is left wondering what the future will bring.
Cue the critics, which have included both government officials and pundit-penned Op/Eds in State (and State-ish) news outlets. As example of the former is Xinhua, which ran a piece entitled “Time Bombs Still Ticking in Washington.” The Op/Ed flogs the metaphor for all it’s worth:
The months-long tug of war between Democrats and Republicans, however, failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer.
Right. The U.S. debt as a ticking time bomb, one that will explode without serious budget fixes. The message is clear: your debt is too high and you better do something about it:
With its debt already almost equaling its gross domestic product, the United States, as a major anchor of the increasingly globalized world economy and the issuer of the dominant international reserve currency, needs to roll out more responsible and effective measures to balance its budget and restore the economic health of itself and the world.
Sounds to me like the author is confusing national debt and budget deficit, but that’s a common one. More troubling is the automatic assumption that austerity (i.e. balancing the budget) is a good idea during an economic downturn. You know, it was only a couple years ago that Beijing was engaged in a massive stimulus of its own economy during a recession. Then again, things look differently when you’re a creditor (or a Republican).
The Global Times ran a similar story, entitled “US Debt Deal Merely Delays Pain For All.” The message here, delivered in a scolding tone, is that the debt ceiling deal does nothing but “kick the can down the road” with respect to the aforementioned ticking time bomb.
By using new debt to pay back the old, the US is sinking further into quicksand. This is not a selfless sacrifice made to save the world, as debt-holding countries are all chained to the US. They would have to keep the US afloat, or everybody would suffer.
China is mostly concerned about its own suffering of course, as it should.
We could go on and on with the criticism, from Zhou Xiaochuan, head of the People’s Bank of China, to Guan Jianzhong, Chairman of China’s Dagong credit rating agency, but I think we’ve hit the high points already.
All this criticism rests on a basic premise, that the U.S. is experiencing a debt crisis. Despite the hue and cry from Republicans and the months-long focus on the topic by the mainstream American media, I just don’t see it.
Yes, the U.S. has racked up a lot of debt in the past few years and is still running large budget deficits. Even so, this does not equate to a crisis. How would I define one? I don’t know, but it seems reasonable to assume that a crisis would be accompanied by higher U.S. interest rates, in effect the market telling America that it wasn’t such a great bet anymore.
So how have U.S. interests rates been this year compared with other countries? Extremely low, and they’ve been there for quite a while. Among the reasons: the U.S. is still one of the only safe places to put your cash, and the country’s growth and employment situation is still crappy.
If interest rates are low, that means you can borrow money. If you do that, you can pay your debt obligations. In the short term, that’s all that’s important.
The long term depends on the U.S. fiscal position. Is the deficit going up or down? What are the projections looking like for the next few years? Again, I don’t see any reason there to panic either.
Why is there a significant budget deficit at the moment? Is the U.S. government not capable of living “within its means”? Not at all. In fact, as a very useful post (caution: graphs!) on the Angry Bear blog puts in, this is all about recessionary/counter-cyclical spending:
The truth is, that deficit hysteria has been set in motion by a surge in government spending on items like unemployment compensation, food stamps, and other types of ‘support payments to persons for whom no current service is rendered’ AND low tax receipts. Yes, long-term reform is needed; but my general conclusion is that the deficit hysteria is sorely misplaced.
There’s no ticking time bomb. No crisis, no reason for hysteria. The U.S. debt is large, but interest rates are low and the nation’s fiscal situation should improve dramatically with economic recovery (whenever that happens).
The Chinese critics are right in panicking over recent U.S. political shenanigans. For no apparent reason, politicians nearly drove the U.S. to a default situation, which would definitely have harmed Chinese economic interests. That situation could be replicated in the future, so if I’m an official in Beijing, I’m definitely worried about my dollar holdings.
However, that official would be wrong to buy in to the Republican paranoia. This has primarily been a political crisis, not an economic one.
And in the short term, given that China still relies to a significant degree on the U.S. export market, Beijing should be just as concerned with the negative growth effects of the debt deal as they are about America’s ability to pay back its creditors.