In a revealing discourse between the Chinese and U.S. governments, one government was urging the other to adopt sound monetary policies coupled with fiscal restraint to protect investments in treasury debt of the other. Unfortunately, the government rolling the dice and living without regard to paying its future bills is the U.S. government, while the Chinese government counsels restraint and sanity.
The Chinese have good reason to be concerned about the integrity of the U.S. treasury debt they hold. As long as the U.S. keeps printing “cheap” money and flooding the markets with it, inflationary pressure continues to build. Inflation reduces the actual value of treasury debt held by investors and also brings a host of other problems, such as inverse salary values and high interest rates on loans. With $801 billion in U.S. treasury debt owned by the Chinese, 3 percent inflation could reduce the debt’s value by $24 billion per year.
The Obama administration tried to save face by suggesting there are questions Obama wants answered regarding China’s long reliance on massive trade surpluses with the United States to bolster its domestic economy. Ultimately, however, this posturing by the administration is meaningless and merely resembles the local alcoholic questioning the bartender’s reliance upon liquor sales to bolster his income. Until the U.S. decides to balance its own budgets and live within its means, all we and other investors have as assurances regarding sound monetary policy are statements by the Obama administration that it has some sort of vague, secret plan to deal with it. And if the Chinese aren’t worth listening to, it wasn’t long ago that “Saturday Night Live” had some good advice for big spenders: “Don’t buy stuff you cannot afford.”
