The future foretold here!

I’ve warned about the simple fact that China owns us in this space before. Because we Americans feel that we are automatically entitled to everything we want … and we’re entitled to it right now … we the people have borrowed close to $800,000,000,000 from China. Up to this point, we’ve borrowed more from China than from any other nation. In previous blogs, I’ve put it this way, “America will not fall to foreign aggressors! … But China might decide to simply buy us with our own dollars some day.”

A new headline in The New York Times suggests that “some day” might be dawning.

Foreign demand for Teasury securities falls

There’s an old story about banking that applies here, however.

Mr. A goes to the bank and borrows $100,000. Later, he loses his job and can’t pay it back. Result: The bank owns Mr. A!

Mr. B, however, goes to the bank and talks them into loaning him a thousand times as much: $1,000,000,000. Later, his business idea fails and he can’t pay it back. Result: Mr. B owns the bank!

China is caught in a trap of their own making. We have borrowed so much from China that if we go down in flames, they go down with us. And they know it. To illustrate the point, let’s consider an extreme example (that won’t happen).

Suppose China decided that they’ve had enough of our profligate ways and simply decided to trade our debt for whatever they can get for it: Other people’s debt; gold; real estate; Euros … whatever. At the first momement this started to happen, the hypersensitive international financial community would start dumping all of their US debt too. It would be an old-fashioned “run on the bank” of … well, I was going to write “astronomical proportions” but the fact is that numbers in international finance get bigger than numbers in outer space these days. The value of our debt would drop to a fraction of what it’s worth now – including China’s $800,000,000,000. We wouldn’t be able to pay for any more imports – of oil or Chinese melamine-contaminated food. It would be a world-wide economic collapse that would ruin everybody. Famine would immediately start to stalk the land throughout America, and indeed, throughout the world (even more than now).

They know that. We know it. The international banking community knows it. So … that isn’t going to happen. At least not like that.

China can’t afford to squeeze us too hard. But they can pick and choose exactly when and how hard they do want to squeeze us.

The administration of late has been standing up to China and making them mad. We’re selling arms to Taiwan. President Obama is meeting with the Dalai Lama. Secretary Clinton has complained about their disregard for human rights and even Google is complaining that China’s rulers are acting like … well … like they own the place.

In response, China has decided to simply not buy as much of our foreign debt. They’re not selling their incredible hoard. They’re just cutting back. (Our old whipping boy, Japan, is now the largest holder of US debt and foreign holders of US debt dropped more in December than for any other month in history, largely because China has cut back.

The result for you and me is just like it is for any other bad credit risk. The good old US of A will have to pay more in interest if we want to borrow more money. And we will have exactly the same menu of choices available to us in the future. We can try to borrow even more to keep up our “accustomed way of life” or we can tighten the old belt and eat a lot more potatoes and a lot less steak. And forget about eating out after a movie. We might lose our house. (Did you know that IBM, the inventor of the PC, sold their entire stake in the business to China years ago?)

Do you feel like a puppet dancing at the end of strings? You will.