The Elephants in the Room

You hit the nail on the head when you said that the Chinese (and the UAE, the Saudis and all the other sovereign funds) want their money back.

That's why there are bank bailouts.

How did they get stuck with all those US dollars? Because the US dollars came from its position as a reserve currency (the oil states—all commodities are traded in US dollars—not because the world loves the US but because any country trying anything different gets invaded) and from the net dollars received in trade.

Since the so-called free trade and free-market loving US is really protectionist (why do you think Murdoch became an American?) (remember the screams when they tried to invest in mining or port maintenance), these funds had limited investment opportunities in the US.

Posted by: Albertde | Mar 14 2009 16:47 utc | 1

My, how far we've come (haha) in 37 years.

http://www.chinapost.com.tw/business/americas/2009/03/14/200019/U.S.-assures.htm>U.S. assures China over bond investments

WASHINGTON -- President Barack Obama's economic aide Lawrence Summers assured China Friday that its hundreds of billions of dollars in U.S. bond investments were safe. Reacting to Premier Wen Jiabao's concerns about “the safety of our assets” in the United States, Summers said, “This is a commitment that the president has made very clear — we need to be sound stewards of the money we invest.”

China held US$727.4 billion in U.S. Treasury bonds at the end of last year, ahead of Japan, the holder of US$626 billion in bonds, according to U.S. government data.

Expressing the concern in Beijing, Wen called on U.S. economic planners to safeguard the Chinese assets.

“We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets,” Wen told reporters.

“To be honest, I am a little bit worried and I would like to ... call on the United States to honour its word and remain a credible nation and ensure the safety of Chinese assets.”

As the largest creditor to the United States, China is “extremely interested in developments in the U.S. economy,” he said.

Summers, asked to react to the premier's concern at a Washington forum, stressed that the United States had to utilize all resources available at present to jolt its economy from prolonged recession.

While the United States had to borrow at an “admirably high scale” now to make up for the loss of revenue due to the recession, “it does mean that your debts can't be rising relative to your incomes” when the economy begins to expand, he said.

He assured that the Obama administration would move to “getting the budget deficit, getting national finances on a sustainable basis as the economy expands.”

http://www.history.com/this-day-in-history.do?action=Article&id=2729>Nixon announces trip to China

During a live television and radio broadcast, President Richard Nixon stuns the nation by announcing that he will visit communist China the following year. The statement marked a dramatic turning point in U.S.-Chinese relations.

At first glance, Nixon seemed like the last American president who would ever consider a visit to the People's Republic of China. Since the communists came to power in China in 1949, Nixon had been one of the most vociferous critics of American efforts to establish diplomatic relations with the Chinese. He was known as a fervent Cold Warrior, and had been one of the leading figures in the post-World War II Red Scare, during which the U.S. government launched massive investigations into possible communist subversion in America. By 1971, however, a number of factors pushed the anticommunist Nixon to make the dramatic decision to begin a rapprochement with communist China. First and foremost was the Vietnam War. In 1969, shortly after taking office, Nixon promised the American people "peace with honor" in Vietnam. Two years later, and with thousands more Americans having been killed in the conflict, peace seemed no closer than before. The United States was also aware that the Chinese were eager to improve relations. The Chinese split with Russia in the mid-1960s left the Chinese communists looking for new allies, and diplomatic relations with America would mean increased trade possibilities, something the growing Chinese economy desperately wanted.

Following the advice of National Security Advisor Henry Kissinger, Nixon hoped to use the promise of closer relations with the United States to convince the Chinese to put increased pressure on North Vietnam--a Chinese ally--to reach an acceptable peace settlement in the war. Other factors encouraging the visit included the constant demands of U.S. businesses for diplomatic relations with China so that its markets would open to American trade and investment; Nixon's need for a dramatic act to revive his sagging popularity with the American people; and Kissinger's hope that closer relations with China would make the Soviet Union more receptive to U.S. diplomatic initiatives. It was with these ideas in mind that Nixon announced on July 15, 1971, that he was going to make a "journey for peace" to communist China in May 1972, at the invitation of the Chinese government.

Nixon undertook his historic visit to China the following year, thus beginning a long and slow process of normalization of relations between the People's Republic of China and the United States. The immediate diplomatic and political rewards of Nixon's initiative were not readily apparent. The war in Vietnam dragged on until January 1973, with the Chinese apparently having little, if any, impact on North Vietnam's negotiating stance. Nixon's trip to China did inspire a good deal of anxiety in Moscow, but whether the policy of detente was helped or not is debatable. The 1972 trip was certainly front-page news in the United States, and may have been one small factor in Nixon's resounding victory in the presidential election of that year.

Posted by: Obamageddon | Mar 14 2009 17:38 utc | 2

@Albertde - the bailout money is not going to China, but to fulfill AIG's contracts with European (and U.S.) banks and to keep bond holders of bank debt (PIMCO etc) whole.

China has lots of treasuries but also others U.S. "assets" and the warning China gave can also be seen as being about these other assets (agency and company bonds, stocks).

Brad Setser has the details.

Posted by: b | Mar 14 2009 18:17 utc | 3

As seems to be the pattern, recently --

The Chinese have less to lose, here, than anyone else.

Posted by: china_hand2 | Mar 14 2009 18:46 utc | 4

The Chinese have less to lose, here, than anyone else.

A trillion her and a trillion there and suddenly one talks about real money ...
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Of course China has lots to loose and especially its leadership has lots to loose. People do not like it when their money gets wasted and may go for other leaders.
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It is a very evil and interesting situation:

China has already financed too much U.S. debt but must continue to buy Treasuries if it wants to keep the RMB bound to the $ to further its exports.

The U.S. wants China to revalue the RMB upwards but also wants China to continue to buy Treasuries.

Both are in a trap here and to get out of it will be very difficult for both sides.

Posted by: b | Mar 14 2009 19:05 utc | 5

While the G20 Group ministers are spending their time on measures to solve the Wall Street/Washington created worldwide meltdown, they should be paying more attention to the coming meltdown in US Treasury obligations and the US dollar.

Washington’s long-term choice is either repudiation or monetization. For monetization to be effective, the depreciation in the dollar would have to be substantial and this in turn would dramatically raise prices of imports for American consumers which would mean a tremendous drop in foreign imports. Debt monetization would cause more disruption to exporting nations than selective repudiation of Treasury debt.

Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasury bonds, the dollar, gold and the stock market.

The Campaign to Cancel the Washington National Debt By 12/21/2012 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts
Thanks,
Ron

Posted by: Ron | Mar 14 2009 22:15 utc | 6

It's a sharp contrast between a creditor that wants its debtor to repay the money lent, and a debtor who must rig the game and intimidate their already-poor friends to find the means to do it.

I don't think, at the personal level, anyone would suggest that the creditor in such an arrangement is feeling greater pressure than the debtor. It's like saying a loanshark feels less pressure then his customers. If the U.S. defaults, the whole world will feel it -- not just China -- and the entire world will re-route itself around the gaping hole that used to be filled by the U.S. economy.

And, given a choice between borrowing from a country that has already enshrined wars of aggression, torture, and limited nuclear war as their preferred means of debt collection, or borrowing from a country whose military almost never gets past its own borders, which one do you think other peoples are going to prefer?

Posted by: china_hand2 | Mar 15 2009 4:17 utc | 7

Some interesting (long) views on the economy of China and from China by James Fallows in The Atlantic: China's Way Forward

Idle factories, moored container ships, widespread bankruptcies, massive migration back to the hinterlands, strangely clean air—the signs of depression are everywhere in China. Because it makes so many of the goods the world isn’t buying now, China stands to be worse hit than the rest of the world —just as America was during the Depression, when it was the world’s sweatshop. But like America then, China will use tough times to design innovative products that will get it the high profits and the high-value jobs Americans kept to themselves for decades. And that is very bad news for the United States, unless it uses tough times to reinvent itself, too.

Posted by: b | Mar 15 2009 12:09 utc | 8

Interesting indeed. Thanks much for the heads-up.

Posted by: china_hand2 | Mar 15 2009 12:48 utc | 9

It baffles me why we keep expanding our military budget when it is our fruitless military adventures abroad that have been sucking the life out of our economy. It's almost as though our war profiteers have duped us into believing that our military might will breath life back into our economy, enabling us to live the high life once again.

Posted by: Cynthia | Mar 15 2009 14:39 utc | 10

I like Fallows comment on China's "strangely clean air."

On the other hand, the air in the US is suddenly much murkier than usual. That's because of the amount of obfuscation being put up over things like the bank bailout, the stimulus package, how severe is the recession, etc. This is a time of intense public rhetoric, as special interests, public officials and nations clamor to make their case, hide their crimes, deceive their shareholders and citizens. It's a good time to just retire to a hill-top and watch the distant battle through the haze.

Posted by: seneca | Mar 15 2009 14:40 utc | 11

The United State of Arrogance, even with the in several ways seemingly positive administration of Bulimo Charisma, appears to function as if it was still on the plutonium standard (after having left the gold standard in 1971)

Posted by: Chuck Cliff | Mar 15 2009 18:58 utc | 12

Chairmen Ben speaking on 60 Minutes. "'When' depends a lot on things." Clear as mud!

We live near a railroad spur several miles long that was slated to be ripped up. Then in the winter of 2002, suddenly that abandoned spur was filled with parked flat cars, mostly, like the kind you'd ship a Caterpiller D-10 on, cross-country.

Then Bush declared GWOT, and the spur cleared out overnight like spring breakup.

Last week, for only the second time in local memory, the spur is now chock-a-block with the super ocean transport carrier flat cars, that are used for hauling double 40-foot Chinese import containers. Hundreds of them, idled on the spur:

http://en.wikipedia.org/wiki/File:APM_Terminals_WJ_Grimes.JPG

Delivered yet untransported ASEAN cars have completely filled West Coast ports, so much so that you can now see them from Google Earth, on the satellite photographs.
Tens of acres of parked cars. Hundreds of acres, shimmering metallic in the sun. Ironically, or perhaps understandably, used car lots have been abandoned, unsold.

Clearly, the 'when' does not depend on Wen.

"In a moment, Bernanke tells US what the first signs of recovery will look like."
Well, that'd be the Bentley filled with wealthy Chinese investors, in your 'hood.

Posted by: | Mar 16 2009 2:18 utc | 13

Do you really think that the US will resist international regulations as being attacks on its sovereignty? A lot of the talking up of this idea is coming from the US; the Fed, the Treasury, and the MSM talking heads (i.e. the people who actually seem to be making the rules, albeit as they go along). It ain't just the Europeans.

Posted by: ScuzzaMan | Mar 16 2009 22:12 utc | 14