For a few, brief shining years that bumpered the last and current centuries (1998 – 2001), the Treasury of the United States ran a surplus (detailed statistics can be found here, pp. 21-22). As a modern phenomenon, an American surplus is weird: since the 1930s, the US government has almost always operated at a deficit. So, at some level, it was not so unusual when President Bush and his Republican Congress went on a debt-financed spending spree (a tax cut here, a war there …) that plummeted the US Treasury back into deficit spending.
And it was not so unusual that the new deficits were partly financed with US Treasury bills purchased by private investors and foreign governments. Though low-yielding, US Treasuries are among the world’s safest and most stable investments. So when a foreign government with a whole lot of excess dollars – like China’s – suddenly needs somewhere safe to park greenbacks, US treasuries are the natural depot (I hereby acknowledge – but purposely do not go into – the currency manipulation angle involved in some of those investments).
It’s worth noting that the US government has long been the largest holder of US Treasuries (with approximately 42% of the US$8.8 billion outstanding; see p. 48, here), followed by a range of foreign governments. Currently, Japan is the leading foreign holder of US Treasuries, with US$615 billion in holdings as of May 2007 (the most recent data on foreign holders of US Treasuries can be found here). Yet while those holdings have remained relatively stable, the holdings of China – now, second-place on the list of foreign holders of US Treasuries – has increased markedly, from US$324 billion in 2006, to US$407.4 billion in 2007.
At the same time, Chinese investment in a marginally more risky American security – mortgages – has increased from a mere US$100 million in 2002, to US$107.5 billion in 2006, making China the single-largest foreign holder of US government mortgage backed securities (Japan is second, with US$85.3 billion in 2006), with 2.7% of the total in 2006.
Anyway, one unfortunate result of China’s (rather) sudden and growing interest in dollar-based securities is a sudden case of hysteria that appears to afflict US Presidential candidates. I bring this up because, last night, I had the unexpected experience of watching roughly 30 minutes of the AFL-CIO Candidates Forum in Chicago. This unwieldy event pitted seven Democratic candidates for president against each other on a range of issues, not least of which was China.
American presidential debates are not, typically, subtle events, and Keith Olbermanm, the debate’s host, proved the point by asking each candidate to comment on whether or not China is “ally or adversary.” Thus began a hysterical litany of charges against the Chinese, the most ridiculous being the implied and direct claim that the United States is, somehow, mortgaged to Beijing. For example, Senator Joseph Biden:
The fact of the matter is, though, they hold the mortgage on our house. (Crowd reacts.) This administration, in order to fund a war that shouldn’t be being fought and tax cuts that weren’t needed for the wealthy — we’re now in debt almost a trillion dollars — a trillion dollars to China. We better end that war, cut those taxes, reduce the deficit and make sure that they no longer own the mortgage on our home.
[note: “crowd reacts” is inserted into the Federal News Service Transcript as reprinted on the New York Times website]
Those pesky Chinese bankers hold “our” mortgages? Hardly. As I just pointed, they hold maybe 3% of US mortgage-backed securities. $1 trillion dollars of debt owed to China? Only if you are willing to round up US$600 billion in Treasuries to $1 trillion. To be fair, I realize that not all Chinese dollar-backed investments are in Treasuries and mortgages, but most of them are – a fact that totally eludes Biden.
Unfortunately, hysteria over Chinese bankers is not confined to third-tier, long-shot candidates like Joe Biden. Senator Hillary Clinton, following Biden, heartily endorsed his factually-challenged dogma:
I want to say amen to Joe Biden, because he’s 100 percent right … We’ve to get back to fiscal responsibility in order to undercut the Chinese power over us because of the debt we hold.
[Presumably, Clinton means the debt that “they” hold.]
Meanwhile, Senator Barack Obama, Clinton’s top rival in the race, couldn’t resist taking his own shots at the Chinese bankers. In the process of answering Olbermann’s adversary v. ally question, Obama touched on the true meaning of fiscal responsibility:
… it means that we are also not running up deficits and asking China to bail us out and finance them, because it’s pretty hard to have a tough negotiation when the Chinese are our bankers (cheers, applause). And that’s something that we’re going to have to change.
[note: “cheers, applause” is inserted into the Federal News Service Transcript as reprinted on the New York Times website.]
So let’s review. The Chinese hold roughly 4.6% of the US federal debt, second to the Japanese, who hold 6.9% of it. They also hold roughly 2.7% of US mortgage backed securities, making them the top foreign holder of that particular dollar denominated investment. They also hold unknown amount of other US dollar denominated investments, though none so large as the treasuries. Now, again, I’m no economist, but these numbers do not strike me as fear-worthy, especially considering China’s avowed intention to diversify its currency reserves into higher-yielding non-dollar denominated assets.
Does any of this justify the specter of evil Chinese bankers now wafting through Democratic presidential politics? No, but that’s unlikely to stop the invocations. “China bashing” as a campaign tactic (and its predecessor, “Japan bashing”) is a much-beloved tactic in American politics, and with US-Chinese trade disputes increasingly in the public eye (disputes often based upon legitimate US gripes), they are likely to become more frequent and jingoistic.
[UPDATE: The Chinese government seems intent on helping the Democratic candidates make their case. According to several reports, the Chinese are threatening to liquidate their Treasury holdings if the US attempts to force yuan revaluation via trade sanctions. Everyone is calling this a “nuclear option” because exercising it will assuredly devastate Chinese exporters dependent upon a favorable currency exchange between the US and China. Perhaps somebody could help me understand what the effect of a sudden dump of US$400 billion of Treasuries would do the dollar. Comments and emails, much appreciated.]