NOTE: This diary has been updated, after corrections provided by randomfacts:
Last winter December, China protested fiercely against the idea of new arms sales from the US to Taiwan. was angered that W we went ahead with the arms sales to Taiwan which they'd earlier protested.
Last June, when China reduced their holdings of US Treasury bonds by about 25 billion dollars' worth, Japan stepped in to fill the $25 billion shortfall, and then some.
But in December, as after it was announced that the arms sale was going through to Taiwan, China reduced their holdings of US treasuries by $34 billion. Japan struggled to bolster the dollar, but bought only $11.5 billion worth of treasuries. China now holds about $755.4 billion worth of our securities, down from about $801.5 billion last May.
Says the Reuters article on the latest sell-off, "Some analysts fear a waning appetite for U.S. debt could push up Treasury yields and weaken a fragile U.S. recovery." If the US must pay higher yields on its treasuries, this means that an ever larger amount of our deficit must be committed simply to paying off interest. Any credit-card holder who's carried over a balance for a while knows what that means. I hope. (Psst: it means you never pay off the damn balance, 'cos you're always paying interest.)
I am aware that the size of the deficit is a political brickbat that is used against Obama. I am aware, too, that a lot of the programs contributing to this deficit are not of Obama's making. Is he supposed to veto Medicare and Medicaid benefits?
However, China's concern to diversify from the dollar is largely due to our insistence on ballooning our deficit. And though we can't blame Obama for all of that, this is a bipartisan military and entitlements spending spree, and it's no secret that they've been completely unable to rein in this spending in a responsible manner. That's simply a fact. Look at France and Germany, those profligate, socialist, Marx-loving, health-care providing ne'er-do-wells. How have these third-world failed states fared, you're so smart?
Well, Germany had a deficit last year. And it was a BIG one--for them. How big? A whopping--
--wait for it--
$24.7 billion in the first half of last year!
WOW!
Well, but wait a minute: let's put that in perspective. How much is that, relative to their GDP? That's the important figure.
1.5 percent of GDP edit/correction for the first half of 2009. In order to be a part of the Eurozone, you must be at less than 3% of GDP, so they're pretty much okay. NOTE: randomfacts cites Bloomberg as saying that Germany is now at a projected deficit for 2010 of 6% annually, though the Economist gives the figure as 3.2% for 2009. /edit If you're at 5% or more, you're in a bit deeper. Of course, I think that Greece and the other PIGS I countries, as a poster here termed them, are at 12 or 13 percent of GDP, some of them, and Germany and France may be on the hook to bail them out. So I wouldn't bet on the Euro, either. Nor yet the Pound Sterling, pressured always by the British banking system's woes, and by the fact that their aging population comes with pension demands of its own (this is why they didn't sign on to the Euro, as I understand it--they could never have met the "deficit at or below 3% of GDP" requirement).
But Germany's deficit is at 1.5 percent of GDP. WITH A NATIONALIZED HEALTH SERVICE.
Now China is divesting from our Dollar.
We have, by all accounts, enjoyed tremendous insulation from many, many economic shocks on account of having the right to issue the world's reserve currency. But that was with the Gold Standard, which we got off of in 1971. Since then, there's been nothing holding the Dollar up but our strong economy, and one other thing. That is that those with whom we run balance-of-payments deficits, like China, Japan, and the oil sheikhdoms, have always repatriated the excess dollars we keep sending them. Each month, we buy much more than they buy from us. What do they do with those dollars? They take trips to Paris, buy some Cadillacs, and when that gets boring, they buy our treasury bonds, to make sure their billions of US dollars don't lose their value quicker than you can say Gineih Masri.
But now, with China rather boldly cutting its stores of US treasury bonds, where they used to buy them and keep up the value of the dollar, how long can Japan and the oil sheikhs make up the difference? (Hint: the articles above show Japan doughtily doing so last year, but failing to do so in December, as mentioned above.) Especially if others follow China's lead, it won't be long.
Then, with people failing to buy US bonds, what will happen? We'll raise rates. What will that mean? See above: remember our credit-card holder? His/her rates just got raised. Can s/he make the payments? Depends upon the rate. How bad is his/her credit?
Our credit rating would take a hit, I would bet, if all of the above came to pass.
As mentioned, the Pound and the Euro have problems too. The Swiss have kept a careful policy, since the financial crisis broke, of keeping their interest rates at such a level that people couldn't rely on them as a base from which to attack the Dollar. But that relies on the vagaries of their own economy. Currencies like the Aussie Dollar, the Canadian Loonie, the New Zealand Kiwi, are backed up by riches in commodities. (Commodities prices have done well along with these problems in paper currencies, so those nations with oil, mining and farming industries have done some business. Brazil's Petrobras oil company, with a near-monopoly on oil exploration in Brazil--a stable area for oil production, relative to uncertain areas like the Middle East, with its wars, or west Africa, with its unrest surrounding the perception--OK, reality--of foreign oil companies' exploitation of locals.) Also, Australia's public spending, while rising lately, still reflects nothing like the ridiculous amounts mentioned for our Medicare service, or any liabilities like bailing out Greece. But I'm not sure the Aussie and the Kiwi and the Loonie seem capable yet of fulfilling the role of the world's reserve currency.
One thing seems certain, though: China's December sell-off was a shot across our bow. We're going to start noticing soon. I'm not sure whether we're not about to realize we're really a Chinese vassal state. I don't know, either, whether we'll EVER sell another fighter plane to Taiwan.
When China has made certain we've stopped doing so for good, then they'll move. China is not a Napoleonic France or a Hitler's Germany. They're not looking to take over the world. But they have been quietly building a submarine fleet, along with the missiles they have directed toward Taiwan. For whatever reason, that rankles them like few other issues. Taiwanese, too, have told me--sharply--"well Taiwan is historically part of China, you know."
I'm worried. We have, the last time I looked, an agreement to help Taiwan, if it's invaded. But what happens when that day comes? And what will happen when, as seems likely, divestment from the Dollar as the world's reserve currency leads to a new and unrecognizable world?