America: In Danger to China

During our “blog shows” in class the other day, a question was brought up about the United States’ debt to China. In a follow-up, I’d like to touch on the subject.

Some people believe that it is not a good idea that most of U.S. government operations are financed by a communist country. At the end of 2005, China, with $820 billion in such assets, was the second-largest holder of U.S. debt after Japan, which held about $10 billion more. Owning such a significant amount of U.S. assets gives foreigners considerable economic influence. If China even reduces its Treasury purchases, the U.S. would run into substantial difficulties. According to the Nikkei Weekly, a Japan-based business magazine, “Beijing is holding a dagger to Washington’s throat.”

Moreover, if foreigners, specifically China and Japan, decide to stop accumulating U.S. debt and start spending it, the result would be an increase in the supply of U.S. currency in circulation. In return, this would drive the value of the dollar down, making American goods less expensive; moreover, American corporations and companies would become large targets for foreign acquisitions.

America’s indebtedness to China is very endangering, especially given China’s current state in the economy. If China decides to fix its banking system problem and start to spend rather than save, Edwin Truman (pictured), who directed the Federal Reserve System’s Division of International Finance for 20 years, warns that the United States will probably be well on its to a “catastrophic disaster on the scale of the Great Depression or worse.”