A View about Mr. Wen's Comments About US Debt
The Opinion below from the WSJ concerns the comments made by Chinese Premier Wen Jiabao concerning US debt. Mr. Wen's comments made last week caused quite a stir because the US is hoping that the Chinese, already the largest international holder of US debt, will be willing to buy more. Text in bold is my emphasis.
Chinese Premier Wen Jiabao created a useful stir late last week when he said he's a "little bit worried" about the safety of U.S. assets -- meaning the Treasury bonds his government owns. Whatever Mr. Wen's political motives, his concerns about the integrity of U.S. sovereign debt are timely and apt.
U.S. debt held by the public has now hit $6.6 trillion -- up from $5.3 trillion only a year ago. That doesn't count another $5.3 trillion in Fannie Mae and Freddie Mac liabilities that we now know also have a taxpayer guarantee. And it doesn't count the many ways that both the Federal Reserve and Treasury have guaranteed financial assets more broadly -- such as $29 billion in Bear Stearns paper, $301 billion in dodgy Citigroup assets, and hundreds of billions in Federal Housing Administration loans.
President Obama's stimulus plan and new budget will require an additional $3 trillion to $4 trillion in new borrowing over the next two or three years, and that's if the economy recovers smartly. Adding it all up, Federal Reserve Chairman Ben Bernanke last week estimated that U.S. public debt-to-GDP would reach 60% over the next few years, up from 40% before the financial panic hit -- and the highest level since the aftermath of World War II. He must be an optimist. As the nearby chart shows, Mr. Obama's budget anticipates a decade of outlays far above postwar spending and revenue averages. And even that assumes, implausibly, that most "stimulus" spending will be temporary.
That's a lot of T-bills to flog, and the world is taking note. Our colleagues at MarketWatch reported last week that the cost to buy insurance against U.S. sovereign debt default has surged in the past year. The spreads on credit default swaps for U.S. government debt hit 97 basis points last week -- or $97,000 to buy insurance on $10 million in debt -- nearly seven times higher than a year ago and 60% higher than the end of 2008.
Mr. Wen called on the U.S. to "maintain its credibility, honor its commitments and guarantee the safety of Chinese assets." Little wonder: China, like other trading nations, has a big stake in this fiscal free-for-all. Although it doesn't release detailed data, roughly two-thirds of Beijing's $1.9 trillion foreign-exchange reserves are likely parked in U.S. Treasury debt.
The Obama Administration revealed its sensitivity on the issue by responding quickly, with Presidential spokesman Robert Gibbs saying Friday "there's no safer investment in the world than in the United States." Mr. Obama added Saturday that "not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States."
The White House is almost certainly right that the U.S. won't default; the consequences would be too dire. But there are risks well short of formal debt repudiation. As the supply of U.S. debt increases, investors may demand a higher yield and interest rates would rise, reducing the tradable value of current Treasury bonds. The other temptation will be to inflate away the debt, which would also devalue dollar-denominated assets.
What Mr. Wen is really saying is that even the U.S. national balance sheet has limits. The dollar is the world's reserve currency, so the U.S. has the rare privilege among nations of being able to borrow (and then repay its debts) in its own currency. America also remains the world's main safe haven in a crisis, as the flight to the dollar and T-bills in recent months underscores.
But reserve currency status isn't a birthright and it can vanish when nations are irresponsible. Deficits are sometimes necessary to finance tax cuts and investments that promote economic growth. The tragedy of Mr. Obama's $787 billion stimulus and $410 billion 2009 budget is that they spend principally on transfer payments that have little growth payback. The U.S. received another foreign rebuke on this score this weekend, when German Chancellor Angela Merkel and other Europeans rejected Mr. Obama's calls for a comparable spending binge on the Continent.
Mr. Wen may have been trying to placate his domestic Chinese audience, which is suffering through its own economic slowdown. Or perhaps he was trying to repay Treasury Secretary Timothy Geithner for his nomination-hearing comments on Chinese currency "manipulation." Mr. Wen doesn't have much room to lecture the U.S., having done too little in his nearly six years in office to liberalize the Chinese economy.
But the Chinese Premier is right to warn the U.S. political class that the global demand for American debt will continue only if the U.S. runs economic policies that make U.S.-dollar assets worth the risk.
The Opinion below from the WSJ concerns the comments made by Chinese Premier Wen Jiabao concerning US debt. Mr. Wen's comments made last week caused quite a stir because the US is hoping that the Chinese, already the largest international holder of US debt, will be willing to buy more. Text in bold is my emphasis.
Chinese Premier Wen Jiabao created a useful stir late last week when he said he's a "little bit worried" about the safety of U.S. assets -- meaning the Treasury bonds his government owns. Whatever Mr. Wen's political motives, his concerns about the integrity of U.S. sovereign debt are timely and apt.
U.S. debt held by the public has now hit $6.6 trillion -- up from $5.3 trillion only a year ago. That doesn't count another $5.3 trillion in Fannie Mae and Freddie Mac liabilities that we now know also have a taxpayer guarantee. And it doesn't count the many ways that both the Federal Reserve and Treasury have guaranteed financial assets more broadly -- such as $29 billion in Bear Stearns paper, $301 billion in dodgy Citigroup assets, and hundreds of billions in Federal Housing Administration loans.
President Obama's stimulus plan and new budget will require an additional $3 trillion to $4 trillion in new borrowing over the next two or three years, and that's if the economy recovers smartly. Adding it all up, Federal Reserve Chairman Ben Bernanke last week estimated that U.S. public debt-to-GDP would reach 60% over the next few years, up from 40% before the financial panic hit -- and the highest level since the aftermath of World War II. He must be an optimist. As the nearby chart shows, Mr. Obama's budget anticipates a decade of outlays far above postwar spending and revenue averages. And even that assumes, implausibly, that most "stimulus" spending will be temporary.
That's a lot of T-bills to flog, and the world is taking note. Our colleagues at MarketWatch reported last week that the cost to buy insurance against U.S. sovereign debt default has surged in the past year. The spreads on credit default swaps for U.S. government debt hit 97 basis points last week -- or $97,000 to buy insurance on $10 million in debt -- nearly seven times higher than a year ago and 60% higher than the end of 2008.
Mr. Wen called on the U.S. to "maintain its credibility, honor its commitments and guarantee the safety of Chinese assets." Little wonder: China, like other trading nations, has a big stake in this fiscal free-for-all. Although it doesn't release detailed data, roughly two-thirds of Beijing's $1.9 trillion foreign-exchange reserves are likely parked in U.S. Treasury debt.
The Obama Administration revealed its sensitivity on the issue by responding quickly, with Presidential spokesman Robert Gibbs saying Friday "there's no safer investment in the world than in the United States." Mr. Obama added Saturday that "not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States."
The White House is almost certainly right that the U.S. won't default; the consequences would be too dire. But there are risks well short of formal debt repudiation. As the supply of U.S. debt increases, investors may demand a higher yield and interest rates would rise, reducing the tradable value of current Treasury bonds. The other temptation will be to inflate away the debt, which would also devalue dollar-denominated assets.
What Mr. Wen is really saying is that even the U.S. national balance sheet has limits. The dollar is the world's reserve currency, so the U.S. has the rare privilege among nations of being able to borrow (and then repay its debts) in its own currency. America also remains the world's main safe haven in a crisis, as the flight to the dollar and T-bills in recent months underscores.
But reserve currency status isn't a birthright and it can vanish when nations are irresponsible. Deficits are sometimes necessary to finance tax cuts and investments that promote economic growth. The tragedy of Mr. Obama's $787 billion stimulus and $410 billion 2009 budget is that they spend principally on transfer payments that have little growth payback. The U.S. received another foreign rebuke on this score this weekend, when German Chancellor Angela Merkel and other Europeans rejected Mr. Obama's calls for a comparable spending binge on the Continent.
Mr. Wen may have been trying to placate his domestic Chinese audience, which is suffering through its own economic slowdown. Or perhaps he was trying to repay Treasury Secretary Timothy Geithner for his nomination-hearing comments on Chinese currency "manipulation." Mr. Wen doesn't have much room to lecture the U.S., having done too little in his nearly six years in office to liberalize the Chinese economy.
But the Chinese Premier is right to warn the U.S. political class that the global demand for American debt will continue only if the U.S. runs economic policies that make U.S.-dollar assets worth the risk.
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