China to US: Forget debt ceiling, cut spending

June 6, 2011

If you listen to Treasury Secretary Timothy Geithner and the rest of Obama administration, failure to raise the debt ceiling by Aug. 2 risks “catastrophic economic and market consequences of a default crisis.

Funny, the Chinese government — holder of $1.1 trillion in U.S. government debt — doesn’t seem to think so. I recently returned from a fact-finding mission to the Middle Kingdom. And my big takeaway is that Beijing isn’t too bothered by the Washington back-and-forth over raising the debt ceiling — provided the result is a long-term budget fix. For that, even a delayed interest payment might be acceptable. But brinkmanship in Congress that only punts the issue, and shirks from meaningful reform, would quickly turn investors in Beijing and elsewhere off.

When asked about government reaction to a temporary stoppage of debt payments on those holdings, a respected top official with an influential government advisory group reminded that investment represents “patient capital.” If a delay in Washington facilitated deep spending cuts, Beijing would grudgingly accept it.

Not that Beijing would be thrilled about it. Chinese officials are concerned about the reaction from a nationalistic public that already thinks America is too quick to blame China for its economic woes. To avoid a subsequent worsening of already fragile relations with Washington, then, Beijing would need to persuasively argue that it gained something in exchange for its forbearance. So the worst-case scenario is a delay that only results in a temporary hike in the debt limit.

But then again, I don’t believe Geithner’s deadline. As analyst Dan Clifton of Strategas notes:

Treasury is not restricted from prioritizing interest payments over other expenditures, and revenues are coming in at 10 times the rate of interest payments. Moreover, cash flow is so strong that prioritizing interest payments over other expenditures will not jeopardize Social Security payments. As such, we expect continued interest payments but a semi-government shutdown to occur which would delay long term spending projects and aid to state and local governments until an agreement could be reached. The net effect of this is that investors should be focused more on the economic implications of a semi-government shutdown than the potential for a US default.

So my advice to the spending hawks on Capitol Hill — of both parties — is to listen to China, stand firm and get something big in return for raising the debt limit. At minimum this would be getting at least $1 in spending cuts for every $1 increase in the debt ceiling, along with the spending caps found in the McCaskill-Corker bill.  Even former Clinton economist Alice Rivlin thinks raising the debt ceiling should be linked to a long-term budget plan.

The debt ceiling provides an opportunity for real fiscal reform, one that shouldn’t be wasted.


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Funny how quickly they drop the whole “Trust Fund” charade when they are threatening people with not paying out Social Security.

Posted by l3randon | Report as abusive

Too Funny, the Commies telling Øbama he’s too far to the Left!

Posted by Constitution1st | Report as abusive

There is no such thing as “patient capital.” Or rather, the (initially) most patient holder of Currency X-denominated debt will quickly become impatient if the value of Currency X (measured against other currencies, commodities, or any “basket” containing selections of the foregoing you might care to name or devise) begins to drop rapidly enough. And the value of Currency X drops to the extent holders of Currency X-denominated debt begin selling it.

The XIV Amendment prohibits only formal repudiation of US public debt; Treasury can re-schedule payments of principal or interest at will. Heretofore, it has been regarded as unthinkable that Treasury might have to consider this possibility. Pethokoukis assures us it’s all to the good that Republicans in today’s Congress are hardy souls, more than willing to think about the unthinkable.

I kinda doubt the guaranty Pethokoukis thinks the Red Chinese gave him is “bankable.” (And if it were, where would we bank it?) If the US’ fiscal condition is really so bad, why is the Peth so sure that taking the debt-ceiling drama right to the brink — and maybe a little beyond — is not all it would take to send the dollar into a death spiral?

Posted by Quercus | Report as abusive

Wowee-gee! Imagine my surprise, Jimmy boy, to find out that your own employer (well, the actual news part of Reuters) completely disagrees with you:

China warns U.S. debt-default idea is “playing with fire” (Reuters) – Republican lawmakers are “playing with fire” by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China’s central bank said on Wednesday. 8/us-usa-debt-bondholders-idUSTRE7571832 0110608

So which is it James? Seems to me like one has gotta be true, and one has got to be…what’s the opposite of true? And while you hesitate, I’m gonna bet there’s a reason why they call one side “news” and the other “opinion.” But not all opinion is created equal. I’m beginning to think your constant party-line editorializing (“GOP should ignore Moody’s debt ceiling warning” was another gem) is a bunch of horse-apples! (Here’s another example of journalism, which paints a bit different picture: 8/us-usa-debt-skepticism-idUSTRE75700720 110608)

I’m going to have to stop reading Reuters’ opinion section–they seem to save their talent for actual journalism.

Posted by Diogenian | Report as abusive

>>Too Funny, the Commies telling Øbama he’s too far to the Left!>>

Even funnier when you consider that I’ve seen many moderate Progressives on Facebook regularly calling Obama a “Republican” President.
He certainly courts big corporate, and even more so come election season. Then again when it costs a billion dollars to run for office today, and so many can’t find jobs while CEOs pull in million dollar salaries, I suppose there is no where else to go for the money :(

Posted by sruthj217 | Report as abusive