A warning from China?

May 25, 2010

Last week, the IMF released a report with serious cause for concern about the United States’ fiscal stability.  Now China is publically criticizing us also.

At a news conference last week Chinese Assistant Finance Minister Zhu Guangyao said his country hopes “the U.S. fiscal deficit will fall as a proportion of GDP as the economy recovers and [will] reach a sustainable level.” Zhu said the Chinese Vice Premier had talked to U.S. Treasury Secretary Timothy Geithner about China’s concerns.

As of March of this year, China held more than $895 billion in U.S. Treasuries — the largest share of U.S. debt held by any foreign country. No one can be quite sure what that fact means for China’s influence on U.S. policy (many politicians worry it will mean China could pressure U.S. lawmakers to adopt — or stop — policies that China likes, or dislikes), but this is one area in which we hope U.S. policymakers heed China’s advice. Many politicians will engage in fear-mongering over foreign country’s owning our debt – the truth is, we should be happy they are willing to buy it as more demand for our debt means lower interest rates. It’s when foreign countries begin to stop wanting our debt (as China seems to be alluding to) that we have a serious problem.

For those worried about the implications of foreign ownership of U.S. debt, the easiest solution is to stop accumulating debt. To accomplish that, spending must be cut down to a sustainable level.

Today, a Strategic Economic Dialogue between the U.S. and China will conclude. The two nations would both be better off if the U.S. could give assurance that we would soon put our fiscal house in order. A simple way to do this would be a firm pledge from Washington that our unsustainable government spending will be reduced to managable levels.

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