Friday, March 20, 2009

Bernanke to China: buy our debt or else

National Lead, follow or get out of the way: On Friday the 13th 2009 the Prime Minister of China, Wen Jiabao, publicly worried about the safety of China’s one trillion dollar investment in U.S. Treasury Notes. On Wednesday March 18th 2009 the Federal Reserve Bank announced that it was going to buy one trillion dollars in U.S. Treasury Notes. Coincidence? Not likely.

This is a game of very high stakes poker. What the Prime Minister of China did was threaten to stop buying U.S. debt. What he doesn’t realize is that he has no choice but to continue and we hope he knows it. He wants us to thinks that if he stops buying U.S. debt the recovery might falter. He thinks that he has the leverage to change U.S. policy. Perhaps he thinks he can make us stop talking about the Dali Lama and forget about Taiwan or Tiananmen Square. Chinese money financed George Bushes war deficit but our trade deficit with China created the great business boom that China has been enjoying and gave them that same cash that has been returned to the US in the form of investment in our debt. It was the industriousness of the Chinese people not the policies of the Chinese government that created the boom. The boom and the wealth it created could just as easily gone to India, the Philippines or even Mexico had the drive and talent become manifest at the right time.

There are advantages to being the world’s largest economy. The U.S. can do things that few second and no third world country can do effectively, that is, print money. When Ben Bernanke, chairman of the Federal Reserve Bank, announced that he was going to buy one trillion dollars worth of U.S. Treasury notes he was effectively telling the Chinese that he was going to print a trillion dollars and buy the notes that the Chinese threatened to balk at. Balking has its penalties. In baseball the runner gets to advance one base, in this case the threat is inflation.

Bernanke’s message to Wen Jiabao was play ball by the rules we’ve agreed to or we’ll make your investment worthless through inflation and we’ll inflate the U.S. Dollar to the point where it’s value is very low relative to the currency of, say, China. Chinese goods won’t look all that cheap and U.S. goods will begin to look very reasonable to the world. Bernanke was telling China that the U.S. was still the big guy on the block and ready and willing to compete.

It will be interesting to see if the Chinese get the message or if they are as dumb as the U.S. Congressman who asked Bernanke if the Federal Reserve Bank was solvent. Hint: Of course they are solvent if they need money they just print it.

See also
Wen Jiabao, Balk, How the Fed prints money

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