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American debt and the Great Chinese Mind-Bender

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chess knightSomeone might want to explain this to me because it defies nearly all palatable logic that I can apply to it. I read earlier this week that China carries a large debt portfolio and that about 70% of it is American debt. Additionally, China is buying up American debt at break-neck speed, while possibly neglecting their own populace in order to do so.

As I was taught, there are two potentially profitable reasons to buy debt obligations. The first (and best) reason is because there is a reasonable expectation that the debt will be repaid, supported by documentation, collateral security, and research. The second reason is because there is an expectation that the debtor shall default, resulting in the expeditious seizure of pledged security assets that are desired.

I've become aware of an unsettling third scenario regarding the value of buying debt. You can easily use it to buy control of the debtor's assets through their weakness.

We can probably assume that the Chinese have heard rumors that American banks are writing off billions of dollars in debt-related losses. I'm guessing that it's no secret around the globe that American debt may currently be a sucker's bet. So are we to assume that Chinese financiers are ill-informed of the facts or shall we believe that they are just stupid? Is it simply a matter of Chinese bankers having a special talent for choosing safe debts to invest in? Should we think that the Chinese believe in us, or is this simply a matter of China's cheap purchase of global political power. I'm thinking that the latter explanation is the case.

To take the matter one step further, what happens if there is wholesale default on the treasury securities China has invested in? You must believe that our government is certainly facing that possibility. If the debts are owed by our government, does that mean China could have the sheriff evict our president from the White House in the event of default? Yeah, laugh now if you want to. Then stop and think about it again.

I fail to grasp the concept well, unless it's as obvious as it appears to be. In which case it would seem that China is knitting itself a massive catch-22. Why would you buy a position into financial stresses you helped create? Why would you purchase debt obligations as, by default, you thwart the ability to repay? It seems all too obvious to me that China has designs on the very soil you'll be buried in. The only problem is, in the process of taking control of American assets, they'll handily destroy the concepts of free enterprise and capitalism that have been essential in their rise toward dominance.

There's a bit of ironic justice beginning to show through the clouds now, and I'm desperate to see how it'll all play out. China's day of reckoning may be closer than you think. In the face of a very limp dollar, which actually makes us more competitive in the world markets, China is experiencing the need to raise the wholesale prices on their goods for export. Suffice it to say, this could play out well for us by breathing a bit of life into American light manufacturing, but only if it creates steady jobs that pay the labor force more than $12 per hour.

The single biggest problem we get when we invite communist governments to play the games of capitalism is that we always have to interrupt the fun to explain to them the probable outcomes. Generally, by the time they figure things out for themselves, it's already too late for them to put things into good order. Then we spend the next twelve or so years bailing them out of the messes they got themselves into. It's sort of like cutting our own throat with the knife they intend to sell to us.

The only new angle to the situation this time is that China and several other countries that hold no regard for free democratic society are now holding the mortgage to the farm. How long will it be before Congress no longer has the clout to stop them from calling that note due and payable? Will China then be buying our manufacturing base out from under us, financed by our own debt? My simple advice to you is this: Don't ever think it can't happen.

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Last updated: July 04, 2009: 02:45 PM

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