Debt ceiling raised but foundations crumble?


Fundie politics and bickering over principles has been a wild show. But whist the politicians have been making a performance over a trillion here or a principle there, isn't the bigger context that you guys have a massive debt and no sign of getting out of it?

Where's the [real] money going to come from?

 

The antics of American legislators take on a new significance when you realize how our leading creditor interprets them. As Beijing sees it, the last three months have furnished ample evidence that—regardless of what the American rating agencies may say—the United States is no longer creditworthy. Even if Congress has pulled back from the brink of outright default, many in China view the debt deal as at best a temporary fix. As the Xinhua News Agency put it, the 11th-hour deal has “failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer.” Meanwhile, the unspoken intention of the Federal Reserve is to debase the dollar through “quantitative easing,” which translates into Mandarin as “printing money.” (It’s no accident that one of the bestselling economics books in China is called Currency Wars.)

So the Chinese have skin in this game. And their U.S. exposure doesn’t stop there. In order to prevent devaluation of their dollars, they have no option but to keep buying yet more dollar-denominated securities. That strategy suits their exporters fine, since it keeps their goods competitive in the American market. But what if the effect of last week’s debt deal, which mandates deficit reduction of $2.1 trillion over the next 10 years, causes a further slowdown in U.S. growth? Not so good.

China has its own economic problems, to be sure. But they are the problems of a rising power. From Beijing’s standpoint, America’s problems are plainly those of a power in decline. We didn’t just raise a ceiling last week. In Chinese eyes, we also fell through a floor.

Debt Debate: China's View