China will destroy us. Our chief creditor has purchased vast amounts of U.S. debt, and horded so much of our currency, that it has a controlling interest in our economy and can dictate every move we make. China might pull the plug at any moment, dumping America’s debt on the open market, and bringing our once-great nation to its knees.
On the other hand, the $895.6 billion owed China is not especially overwhelming, less than 10% of our public debt, and scarcely more than the $862 billion we scratched up for the Recovery Act. Japan’s slice of U.S. debt is $877.2 billion. The UK owns $511.8 billion. America is still a very safe investment, and if China did decide to flex its muscle, it would slam vital doors to its own growth. China needs us. The time may come when China is a threat, but we are not there yet.
President or Dictator Hu Jintao’s visit has created a speculative circus over the impact of U.S. indebtedness to China. The discussion is pointless, because our problem with China is not China. The problem is us. Our debt permeates every aspect of what we are and what we do, forces us to make decisions we would never have considered even a decade ago, and may impede our ability to negotiate with other nations. China is a very small portion of the big picture, but it serves us well as a symbol of our foolishness.
Years of irresponsible spending left us in a poor position to cope with the recession, and has led to talk of allowing states to declare bankruptcy (see: Proposal To Bankrupt States Is Big Government In Disguise). When crisis struck, Washington’s response was to spend hundreds of billions on a Recovery Act that did not create jobs, to force a health care bill that injected massive uncertainty into struggling businesses, and to sink billions more into every spending vehicle imaginable because the partisan balance on Capitol Hill made it possible.
We import vast quantities of goods from China, but allow ourselves to supplant our declining manufacturing base with Chinese imports while our own industries flounder. We failed to heed warnings in 2009 that vital industries were sagging:
Downturns in durable-goods manufacturing and professional, scientific, and technical services along with the continued contraction of construction were among the leading contributors to the decline in U.S. economic growth in 2009, according to revised statistics on the breakout of real gross domestic product (GDP) by industry from the Bureau of Economic Analysis. 1
Our response? Imports from China rose by nearly $37.77 billion in 2010.2
Talk from the Chinese government about switching from the dollar to the RMB, and referring to the international currency system as a “product of the past,” was well-timed pot stirring, but the implication is significant. While China conceded that any shift from the U.S. dollar is years away, even the suggestion that the world might switch from the dollar would have been unthinkable in years past.
Washington talked tough about China’s currency manipulation in advance of Hu Jintao’s visit, ignoring the pivotal role we play in the damage done to our manufacturing sector, and thus the greater economy. The ceaseless effort we put into government spending coupled with our refusal to make wealth-producing industries our number one priority will bear fruit in the years to come, when the only purpose for our economy will be to incur new debt and pay off old debt. As the findings of the Fiscal Commission made clear,
By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security. Every other federal government activity – from national defense and homeland security to transportation and energy – will have to be paid for with borrowed money. Debt held by the public will outstrip the entire American economy, growing to as much as 185 percent of GDP by 2035.3
What was the congressional response to the Fiscal Commission’s suggestions? Nancy Pelosi summed up the Democratic take on spending cuts with absolute rejection, and a recitation of reasons to spend:
This proposal is simply unacceptable. Any final proposal from the Commission should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare. And it must strengthen America’s middle class families–under siege for the last decade, and unable to withstand further encroachment on their economic security.4
This is how we got where we are: spending justified by the quest for economic security.
At least we can take pride in our resolve.