Sunday, June 10, 2018

Will Asia Please Stop Feeding US Debt Addiction?

There's another interesting angle on globalization's pre-eminent economic relationship in the pages of the Financial Times. This story is familiar to virtually all: Asian exporters--especially China--helped keep the good times rolling in the US by providing inexpensive imports to America (lowering inflation) and lending it funds to indulge in a debt-driven spending binge. To make an analogy with drug prevention rhetoric, it often takes two to create a system of dependence. The US, of course, plays the role of the debt junkie, needing around $2.8B each business day in liquidity injections to fund its habit [aaaaahh]. OTOH, Asian exporters (and Mideast oilers) keep providing the US with needlesfull of, shall we say, the good stuff. This analogy, BTW, is quite good in explaining erratic US behavior.

America's funders have a lot at stake at the moment. As the FT article notes, these countries have agitated for the US to bail out the likes of Fannie Mae and Freddie Mac given that foreign holdings of agency bonds approach one trillion dollars. And now we have the matter of a $700B bailout that will ultimately be funded by the likes of the Chinese anyway, provided they are willing to buy more Treasuries. America would be best advised that this is no sure thing [1, 2]. Still, it begs the question better than in the Fannie/Freddie case: who exactly is bailing out whom? China, not the US, would be more accurately said to be bailing out troubled US financial institutions. Given that China doesn't really hold that many, if any, corporate bonds as compared to Treasuries and agency bonds, I think it would be best advised to stay away from US sovereign debt should the $700B bailout plan somehow clear the House.

My view has always been that things will just get worse for these countries if they mindlessly indulge American profligacy. America's addiction makes it a menace to itself and the entire world. Like with any other addict, the debt-addled Uncle Sam needs someone to impose cold turkey ASAP. Hence, the $168B economic stimulus package was quite frankly mindless, the $700B bailout witless, and plans to reduce interest rates Stateside brainless. Isn't it easy money care of foreigners that got America into trouble in the first place? It doesn't take an Einstein to figure more of the same will do nothing to cure what ails America.

Do view the entire article as it provides a concise summary of the main talking points as well as a video interview of Stephen Roach. Meanwhile, below are what I found to be interesting quotes from the perspective of Chinese commentators. This is rather gratuitous, but this is your country [show them an egg]...this is your country on oodles of foreign debt. Any questions?
Did America hang itself with Asian rope? I put this to a Chinese official last week and, quick as a flash, he responded: “No. It drowned itself in Asian liquidity...”

There has been a cautious reappraisal in parts of Asia too. “More people understand that America is not as great as it was 10 years ago,” says Shen Dingli of Fudan university in Shanghai. “This is not a time for China to be on a par with America. But the relative shift of the centre of gravity does bring China more confidence...”

US woes bounce back in other ways, too. In August, Japan recorded its first seasonally adjusted monthly trade deficit in a quarter of a century after shipments to the US slid 22 per cent. Net exports are not expected to contribute anything at all to Chinese growth this year. “China feels the same pain as America,” says Prof Shen. “It is not a case of: ‘Your loss is my win,’ but rather: ‘You lose, I lose...’ ”

Chinese citizens, whose consumption accounts for a measly third of national output – against 70 per cent in the US – could certainly spend more. But Beijing, which has already taken steps to prick the housing bubble, appears in no hurry to encourage reckless spending. Says Mr Fang: “I’m not sure you should encourage people to borrow in order to spend. That is what bankrupted the US.”

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