China still likes US Debt

I wrote back in January "Who will buy US Debt?", well it turns out the Chinese haven't really washed their hands of us yet...

According to FT:

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday.

China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries. However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt.

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

With the $790 Billion Stimulus package, it's becoming clear this strange symbiotic relationship will continue. China and the rest of the World's Economy would crumble if the US Economy were to implode, so in a way they need us, as much as we need them.

Who will buy US Debt?

Today, Obama announced his economic Stimulus plan "American Recovery and Reinvestment," the name of his proposed $750 billion stimulus package at George Mason University.

"Throughout America’s history, there have been some years that simply rolled into the next without much notice or fanfare. Then there are the years that come along once in a generation – the kind that mark a clean break from a troubled past, and set a new course for our nation. This is one of those years. We start 2009 in the midst of a crisis unlike any we have seen in our lifetime – a crisis that has only deepened over the last few weeks. Nearly two million jobs have now been lost, and on Friday we are likely to learn that we lost more jobs last year than at any time since World War II. Just in the past year, another 2.8 million Americans who want and need full-time work have had to settle for part-time jobs. Manufacturing has hit a twenty-eight year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers are watching their life savings disappear. And many, many Americans are both anxious and uncertain of what the future will hold.

I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity, which translates into more than $12,000 in lost income for a family of four. We could lose a generation of potential and promise, as more young Americans are forced to forgo dreams of college or the chance to train for the jobs of the future. And our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically worse...."

What's interesting is that earlier this week, the International Herald Tribune reported that China is losing it's taste for US Debt.

China has bought more than $1 trillion in American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home - a shift that could pose some challenges to the U.S. government in the near future but eventually may even produce salutary effects on the world economy.

But now, Beijing is seeking to pay for its own $600 billion economic stimulus - just as tax revenue falls sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and midsize enterprises, many of which are struggling with slower exports, and Chinese bankers say they are being instructed to lend more to local governments to allow them to build new roads and other projects as part of the stimulus program.

Given the ambitious stimulus plan that Obama has in mind, it will be interesting to see how the Treasury will raise the capital, with demand decreasing for US Debt. In addition, what will be the effect of rising interest rates on capital investments for the private sector and for consumers?

The Individual vs the Collective

I came across this article in the NY Times, of all the conservative writers, I do tend to respect David Brook's opinions more than say those of William Kristol, who pens ideological blatherings for the NY Times.

With the Olympics, you can't avoid all the writing about China's geo-political and cultural differences. However, I found his latest article about the differences between Western and Eastern mind-set rather interesting.

http://www.nytimes.com/2008/08/12/opinion/12brooks.html

It is true that there is a different way of thinking between the two groups, that the Eastern philosphy is that of the collective, thinking of the group as more important than the individual, vs Western philosophy where the individualistic originality tends to be more inherent.

However, I would disagree with David Brook's inherent conclusion that there isn't a sense of collectivism in the US. Nor can we infer that the opening ceremonies show a true picture of a country in harmony. I think the social norms we have today in our neighborhood, the idea of working together for a greater good is evident everyday in the US. Every country has it's moment where an ideal or mission can bring it together for a nationalistic or collective effort.

But at the same time, in Western cultures, we recognize the unique rewards that individualism can bring as well. Throughout history, it's because of individual and creative innovators, that we were able to bring advancement. When you have a collective society all working in harmony, for sure you will have the productivity, but you don't have the creativity to produce something unique and jump start advancements in technology and ultimately your economy.

The opening ceremonies were impressive to be sure, and with so many displaying national pride and given the vast population, China did have the resources to pull off such an amazing show, but we need to keep in mind, that it was just that - a show.