Baseball Crank
Covering the Front and Back Pages of the Newspaper
September 26, 2005
BUSINESS: Too Big To Fail

Mickey Kaus nails it:

The NYT's Tom Friedman, in an exceptionally blowhardish appearance on Meet the Press, laments the effect of massive U.S. borrowing from China:

I think we have--we are now in a position where China has-- they're heading for $1 trillion, OK, of our--in reserves that they're going to be holding, basically. And the leverage that is going to give China over the United States in the coming years, God knows where-- how that's going to play out.

Hmm. If you lend a trillion dollars to someone, does that give you leverage over them or them leverage over you? I'd always thought it was the latter, especially when the debtor is a sovereign nation. What's China going to do, repossess the United States?

Also on the economic front, Mindles H. Dreck notes a New York Times column on the Forbes 400 that has it completely backwards about the degree of upward mobility shown by the changes in the list over the past 23 years.

Posted by Baseball Crank at 12:48 PM | Business | Comments (8) | TrackBack (0)
Comments

Let's see, I borrowed a few hundred thousand from the bank to buy my house and finance my business. I did not realize I now have clout over them.

No, China is not going to reposses the US but it affects our currency value (it sucks right now by the way) and their artificially low currency value. It also has political implications. I can't believe that you as a conservative would advocate a position of deep financial indebtedness to 2 countries (China and Saudi Arabia) who we have consistently tenuous relationships with. Do you really think running the deficeit we are and having it owned largely by foreign interests is sound fiscal policy? By this theory we should borrow a hundred trillion more and really sock it to them.

Posted by: jim at September 26, 2005 4:05 PM

You have no clout over the bank. If you borrowed a hundred million, you would, because the bank would have a serious problem if you didn't repay them. The size of the loan is what matters.

What political implications? If the Chinese sell their bonds, they have to put that money somewhere. Or imagine if nutball Islamists take over Saudi Arabia and cut off trade with us: we stop buying their oil and we freeze repayments on their bonds. Result: we take a financial hit. They starve to death.

Posted by: The Crank at September 26, 2005 4:19 PM

The bank would never loan me that kind of money because people who loan large sums of money are not retarded. They loan me what I have collateral for and the ability to pay back. They don't loan me more than what overextends them either financially or from a position of clout. I am sure the Chinese operate on the same incredibly basic principles of banking.

You don't think that there are political and monetary implications to having large portions of debt held be not exactly friendly countries? You don't think that the value of our currency is tied to actions such as these? You think we are going to stop buying the Saudis oil? You think that the Saudi can't sell their oil to other people than us?

For as conservative on social issues as you are it amazes me that you are willing to let our government be so free wheeling with our money.

Posted by: jim at September 26, 2005 5:36 PM

They loan me what I have collateral for and the ability to pay back. They don't loan me more than what overextends them either financially

You make it sound like big financial institutions don't make imprudently large loans to (1) foreign governments that are bad credit risks, (2) overleveraged corporations (think of Enron - every debacle like that ended with big lenders taking a bath), and (3) megalomaniacal real estate developers. A friend pointed out that it was Trump who said, roughly, "when the bank loans you $10 million they own you; when the bank loans you $500 million you own them."

I am sure the Chinese operate on the same incredibly basic principles of banking.

If the Chinese banking industry operated in a market economy, this might be a reasonable assumption. Chinese investors buy our T-Bills in large part because they are better investments than putting your money in a Chinese bank or with the PRC government.

Posted by: The Crank at September 26, 2005 5:52 PM

The argument that we would then have any leverage over ANYONE we as a nation owed money to is ludicrous.

First, and foremost, and last, and every way in between, the entire sytem of international trade and money is based on trust and an agreement of common value. It's been that way since the Phoenecians (or whomever nearby) learned how to assay gold with a touchstone. Paper currency, or its electronic equivalent is based soley on a promise, and agreed upon belief, that this currency, whether the yuan, dollar, pound or euro, has value. You can default on a national debt once, as long as you have a strong enough military, but that military potential will dwindle quickly, especially when you find out (read today's NY Times), just how much equipment our armed services buy overseas.

The plain truth is George W Bush, complete with a HArvard MBA has no clue how a modern national economy works. Clinton lucked out, in that he kept hands off, or was distracted to, while energy prices, the true lubricant (no pun intended, well only partly) of the world, were low.

In the St. Louis debate with Bush/Kerry, Bush mentioned his "energy policy" which, of course, in non-existent. Silly, stupid and shortsighted. Oil is a poor source for energy because it's not efficient enough to realize a world with growing energy needs--think Malthus and food. I don't know whether the answer is fusion, wind, solar, a beanstalk with huge power conducters, nuclear, whatever. It shouldn't be oil; which is too important for the plastics industry. And don't think plastics aren't almost as important as energy.

Posted by: Daryl Rosenblatt at September 27, 2005 10:02 AM

If you don't think at the level that this is at that the Chinese are a quite sophisticated capitalistic market you are misinformed and operate under the same ideology that our current admin does: that China is not capatalistic and therefore we can get away with stuff because they are naive. They are not.

You also fail to address whether this is a good idea. I assume because you actually know that it is not.

Posted by: jim at September 27, 2005 10:46 AM

Daryl - Obviously, you don't lightly threaten to default, but the implied threat to refuse to pay specific bondholders who try to misuse their influence is a necessary deterrent, and one that will frighten them.

Jim - No, in a perfect world, we'd have no debt and never run a surplus or a deficit. But in the real world, the debt load isn't all that unreasonable, and won't be in the future if we can get entitlement spending under control.

I don't think the Chinese are unsophisticated. I do think their banking sector is a basket case and that's why they are investing their money here rather than in China.

BTW, Kaus updated his post - the Trump quote actually originates with Keynes.

Posted by: The Crank at September 27, 2005 11:08 AM

This may be a simplistic point, but...what clout do the Chinese now have over us? We have their money, not the other way around. They have a vested interest in our economic success, so that we'll repay those loans in full and on time. Of course, the money comes here in the first place because the Chinese know this is and will likely continue to be the best place to invest it. Note that this is true even with China'as own impressive growth rate.

Posted by: John Salmon at September 27, 2005 1:25 PM
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