Punchinello’s Chronicles

December 21, 2009

Behind China Saying Not Enough Money to Buy US Debt

Okay, I’ll admit it. I’m becoming a cynic. Well actually, I’m spending a lot of time learning how to understand the reality behind the so-called news. In fact, “news” as we used to know it doesn’t exist anymore. Headlines exist, media reports exist, even reporting agencies exist. The problem is that they don’t tell us anything about reality. Take, for instance, the story going around today that at least 5 members of the Chinese government are saying there isn’t enough money in the world to buy up US treasury bills (a.k.a. debt).

The overwhelming majority of stories (not factual reports) tell us that here’s the problem: With a shrinking amount of purchases from the United States, there isn’t enough money going overseas for other nations to buy treasury bills and bonds issued by the United States government. As you know, we, as a nation borrow money and issue T-bills and US bonds as IOUs.

Let’s say I buy a Thing from China for $100. I send over one hundred dollar bills to China and they send me back the Thing. Each of those dollar bills is a contract between the US government and whomever holds the dollar bill. The contract says, “The US government will redeem this piece of paper for…” what?

In the old days, it meant you could redeem 35 of those pieces of paper for 1 ounce of gold. Today, it means you can exchange $1 for “something,” somewhere. Nothing objective, just…”something.” Who knows what “something” might be? It could be corn, wheat, copper; or, it could be clothes, envelopes or whatever else you buy in Walmart. As long as everyone believes that somehow, somewhere, some time you’ll be getting something for that piece of paper, we’re good to go.

That’s called fiat money. It’s valuable because I say so! Or the US government or any other “someone” says so.

The problem is that China sells us lots of real things — things you can drop on your toe and say “ouch!” In exchange, they get lots of pieces of paper. They hang on to those pieces of paper until a) they can buy something from America in exchange (like wheat), or b) they can redeem the pieces of paper for IOUs in the form of T-bills and bonds. The dollar bills they’re holding are called their “reserve” currency.

So here’s the deal. Americans (and much of Western Europe) have been buying cheap Things from China for a number of years. We’ve been using credit cards and piling up debt, but that doesn’t matter. The banks who issue us the credit cards are sending our dollar bills to China each time we buy our Thing.

Meanwhile, American governments (state and local) are spending so much money it’s as if they believe there’s an unlimited supply. They long ago ran out of real money, and you can see how each year’s tax payments barely scratch the surface of what’s being spent. So the politicians print up bonds and securities and sell them to China, who in return, send dollar bills back to America. That’s the money supply.

What happens when Americans stop buying stuff from China?

Ordinarily, it’s not a problem. China sells stuff to everyone else and even sells stuff to their own people. But wait! Most of the Chinese population makes about 10-cents a year, barely has enough to eat, lives in mud huts, and might not even own the land they’re standing on. How are they going to buy that microwave oven if they don’t have electricity within a thousand miles of their town?

Okay, scratch that idea of selling to their own people.

The rest of what China sells goes out the door in the form of exports. Walmart imports a bikini, pays a fee to US Customs, and sells it here in the US. You buy it and that’s the money going back to China.

With less and less money going to China as “The American Consumer” becomes more “frugal,” what happens? We aren’t becoming more frugal, we’ve maxed out our credit cards and are losing our jobs! With NO money coming in each week, what the hell are we going to use to buy anything?

So China’s been using up more of its reserve currency to buy IOUs from the US government. Why?

Oddly enough, it’s because the Chinese government has mandated, by fiat declaration that the Chinese economy shall grow by 10% each year. Is there any factual or real basis for that demand? Nope, none at all. It’s only that China wants to stay in the limelight as the world’s darling economy. Everyone loves China! We should look to China as an example of a brilliant economic expansion! Forget the slave labor and incredible inequality between the coastal “haves” and the inland “have nots.”

Uh oh…bad news. Since most of China’s economy rests on exports, and fewer of us are buying those products, China’s economy isn’t growing all that fast. So that 10% is starting to look a bit worrisome.

If you lived in China, the government could simply tell you to buy more stuff or you’d be taken out an shot. But America doesn’t (yet) live in China. So what’s a poor country to do?

The answer is to threaten the United States. “If you don’t start buying more of our stuff, we’re not going to buy any more of your stupid treasury bills and bonds!”

There! How’s THAT for geopolitical interaction!

Alright, fine. So here we stand. I got no money, you got no money, nobody gots no money. We need Mo’ Money! But we Ain’t Got No Money. Know anybody with a job? What about anybody without a job? Oh…those folks working for the government, they’re getting paid with borrowed money. It’s been borrowed from “somewhere,” in exchange for T-bills and bonds.

Think about it: You got no money, I got no money. We ain’t got no money. We’re not buying stuff from China. But our politicians and government employees are all working, they all got lots of money! It’s only that their money comes from China. China is buying US debt with the “old” cash we sent them, back when good times were rolling.

Once again, it’s US…the Little Guys who are causing all this trouble! If WE…the little guys would only buy more stuff from China, then they could keep growing at 10% annual GDP expansion. And China would be hunky-dory. So you’d better get out there and spend…something. What? Nobody knows, that’s a mystery. But you’d better spend it anyway.

If you don’t spend whatever it is, then the federal employees won’t get paid, the US won’t be able to sell T-bills and bonds, and China won’t have enough money to buy those bonds. And then China’s economy won’t grow at 10%. In which case, the entire nation of China will be taken out and shot! End of story!

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