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  • The USA/China Relationship: Obama’s Conflict of Interest

    Posted by Jonathan on July 28th, 2009 (All posts by )

    For years we’ve been selling China a lot of our bonds. We need the money and they want a safe place to put their money. Some people said that we were at their mercy, but really we had them by the balls. A big borrower always has leverage against his main creditor, because creditors want their money back and are reluctant to do anything that might interfere with the big borrower’s earning ability.

    Since our government is increasing its spending substantially, and borrowing to cover much of the new spending, we need China more than we used to. If we can’t sell more bonds we will have to print even more money or raise tax rates even higher than is already planned. Either course of action would eventually be politically costly, perhaps ruinous, for the Obama adminstration. So Treasury Secretary Geithner has been spending a lot of time trying to persuade the Chinese to buy more US bonds.

    I think it’s reasonable to ask what price our country will pay in exchange for Chinese financial cooperation (we are asking them to take more risk, after all), and whether the Obama administration has a conflict of interest. Obama can do things to benefit the Chinese government — such as by muting actions that we might otherwise take in response to China’s military expansion or its hostile behavior toward our ally Taiwan or its human-rights abuses or its lack of cooperation on North Korea — that will be costly for us but whose costs will not be obvious for years. Obama has a strong political incentive to get his expensive programs passed. Could his personal political interest be allowed to trump the national interest? It might if the rest of us don’t pay attention.

    (BTW, we’ve also been selling a lot of our bonds to Gulf oil states. Might there be some worrisome quid pro quos there as well?)

     

    7 Responses to “The USA/China Relationship: Obama’s Conflict of Interest”

    1. Bill Waddell Says:

      Gee … do you think this might have something to do with Obana’s insistence that no import tariff be put on Chinese goods to offset the damage Cap and Trade will do to American manufacturing?

    2. david foster Says:

      Cap-and-trade, without carbon-based tariffs on imported goods, would of course seriously cripple U.S. manufacturing. Cap-and-trade, *with* carbon-based tariffs, would quite likely be in violation of trade agreements that the U.S. has signed and might well set off a global trade war.

      Also, Obama’s repeated assertion that “green jobs” cannot be offshored is nonsense. Most solar-cell manufacturing capacity, for instance, is outside the U.S., and there is nothing about wind turbines that requires them to be made here. The only aspect of “green jobs” that cannot be outsourced in the local installation/construction activity–and there is as true for a coal-fired or gas-fired plans as for a solar or wind plant.

    3. tdaxp Says:

      As we both have leverage in this relationship, perhaps a better way of putting it is ways in which our policies will be harmonized.

      * In Taiwan, both China and the USA strongly support the KMT against the DPP
      * In North Korea, China has for the first time sanctioned individual North Koreans and seized shipments into North Korea
      * In Afghanistan American soldiers die to protect the lives of Chinese mining engineers

      &c.

      * The only areas of current disharmony are Russia (which we view as a Central Asian state that is hostile to European allies, and China sees as a Central Asian raw-material provider), and
      * the Indian Ocean, where we likewise have a need to harmonize our relationship with India

    4. tdaxp Says:

      In response to David Foster, from a geostrategic perspective, cap-and-trade is a way of subsidizing European initiatives to develop independence from Gazprom. When Europeans say “global warming,” they mean “Russia” [1]

      [1] http://www.tdaxp.com/archive/2009/02/06/when-european-governments-say-climate-change-they-mean-russia.html

    5. Whitehall Says:

      Actually, the threat of the Fed printing money is a direct challenge to the Chinese. By doubling our money supply, the real value of the Chinese dollar holdings is cut in half. We have a de facto devaluation underway. The Chinese can reduce that devaluation by continuing to buy dollar bonds.

      We’re partners. remember?

    6. A. Scott Crawford Says:

      Jonathan,

      Here’s a point/issue to consider:

      The first is a consulting report from a couple years ago that caused a stir between EY and the Chinese state bankers (linked below).

      http://www.stratfor.com/global_market_brief_ernst_young_controversy

      Best,

    7. jturner Says:

      Given all the money printing the Fed has been doing, I am very surprised that the gold price is still well below $1,000, as explained here: http://www.bloomberg.com/apps/news?pid=20601116&sid=aA3eLD2EZ5CM