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Thursday, January 05, 2006

Liberal On China Calling In Their "Loans"

More from my liberal baby Boomer friend. He now opines on the trade deficit and China holding US "debt":


we're in deep shit when they call in the loans or stop buying new debt?

My answer:

They have the soundest investments in the world and your scenario will not happen. There are no loans. They own securities that they can sell. Did you read Friedman or not?

Mike Taylor's blood pressure just boiled. He writes:

Fer cryin’ out loud… this guy (?) has no clue as to what he’s talking about.

You can’t “call in” a federal note… this isn’t the short term corporate bond market. The Chinese are not a bank and they have not secured their purchase of federal debt with collateral. Federal debt has a marketplace and that’s the way that holders of federal debt free themselves from the purchase.

Again, my grasp of economics is rudimentary at best… but here’s

If the Chinese stop buying American federal paper there are plenty of others willing to purchase US debt. Because, once more, we have one of the most stable and growing economies in the world and we’re all throwing off tremendous tax revenues to the federal government.

The Chinese are not doing us any favors by holding our debt… they’re investors just like everyone else in the federal debt marketplace.

Tell your friend that he should “First, seek to understand…”. If he’s unwilling to undertake that step he can’t be an effective debater.

-- MTT

I must add:

The Chinese have invested large sums of money in labor and capital to create products. They can now choose to sell them wherever they want. As a seller, you want a good customer that will pay a price that provides you a profit after deducting all of the costs of production and transportation, etc.

Even then you have to be willing to accept a buyer's currency. Do you want to waste your effort marketing to people in Cuba and Venezuela where the government cannot be trusted fiscally and could easily decide to nationalize your goods or retail outlets? Do you market to countries with low per capita income? No, you choose a risk free, wealthy, highly productive buyer. Then after you have their currency, you can either place it under your mattress or reinvest it where one receives the best (or safest) return---in the US.

With the greenbacks, the Chinese can choose to buy hard goods, build buildings, invest in the stock market, buy banks or purchase Treasury notes. Like Mike said above, the currency they hold that is called "debt" are not traditional bank loans. These are investment "securities". They have trade value and pay out scheduled interest. The Chinese in vest here because they choose this country's position as a relatively low tax, free market with high growth. There are few alternatives. Absent the implementation of economicly foolish tax increases and other government measures, the Chinese will continue investing in America forever.

The comment of my self-avowed "Liberal" friend deserves publication because he is a college educated, intelligent voter. He is representative of millions of Americans. His comments show an economic ignorance that is easily swayed by Paul Krugmans and other MSM pundits who tell them what they want to hear.


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