National debt needs to be re-evaluated

With the recession in America obstinately digging its heels in, other countries are continuing to buy up U.S. debt. Money is just pouring down Capitol Hill; the Obama administration is planning on spending more than $2 trillion in the next couple of years, $787 billion in the economic stimulus package, $634 billion for the new health care reform plan, $5 billion to turn around failing schools, and that is just the tip of the spending iceberg as Obama seeks to fulfill his campaign promises.

How is the government planning on obtaining all that money? Part of it, as Republican wailers accurately indicate, will come from taxes; there’s no escaping that yoke. But another huge part of the money will have to come from overseas; in other words, more and more borrowing, which translates to more and more national debt.

While I have no issue with the government’s policy of spending to stimulate the economy (because economics professors have taught me the theory behind the high-flown rhetoric), I am very skeptical when it comes to international financing of U.S. deficit spending.

Currently, the national debt is at over $11 trillion and there is no indication that it won’t continue to grow at roughly the same pace as during the Bush administration. Who is financing the bulk of this debt? China and Japan, who together hold more than a quarter of outstanding U.S. government debt. But in these two countries, opinion is now sharply divided over whether governments that are dealing with the effects of global recession on their own soil should continue to bail out a not-so-remote country across the Pacific.

I have had an opportunity to see this debate firsthand in a recent visit to China. People of all ages and from all walks of life are discussing the prudence of buying more U.S. bonds; with the shaky consensus being that although alternatives look even worse, something has to be done, there has to be some reassurance that China’s enormous holdings of U.S. assets are secure.

Last week, Treasury Secretary Timothy Geithner traveled to Beijing expressly to provide this reassurance, saying that the U.S. government is committed to maintaining a strong dollar and that future spending by Washington will be heavily regulated and disciplined. Chinese concerns (with regard to more than $750 billion in Treasury securities) are very natural; no creditor wants to see its debtor borrow enough money to climb out of the crisis and then devalue its currency so that the true value of the debt is minimized. Not to say that Washington would do this deliberately, but if inflation takes off or the dollar weakens even more as a result of the floating currency market, the value of the bonds would be cut dramatically.

As I see it, the general financial relationship between the U.S. and China is this: Chinese exporters provide an enormous number of cheap consumer goods to the wealthy U.S. market, which boosts Chinas’ economy and helps the government shore up huge currency reserves. Then, China invests these trade surpluses into U.S. Treasury bonds and other U.S. assets without the hassle of having to convert currencies.

This in turn helps Washington finance its large spending programs, which then (theoretically) provide income for American consumers to spend on Chinese goods. Et voilà ! One serving of economic interdependence, coming up.

Now that the worst recession in decades has put this carefully balanced relationship in danger, it is more important than ever to have clear communication from both sides.

There have long been U.S. demands that China let the value of the yuan rise so that Chinese exporters will lose their advantage in foreign markets. U.S. policy makers must realize, however, that it is illogical to ask a country to buy more U.S. debt while pressing that same country to let its currency’s value inflate the net result would be a huge depreciation of the debt that the U.S. owes, with no benefits for the creditor nation.

Though Secretary Geithner’s remarks in China last week were promising, there needs to be more action from Washington to assay foreign debt holders’ fears. The U.S. government must be willing to make costly political decisions for domestic reform and work together with other nations to find a real solution to currency fluctuations. Quick, politically targeted measures are not enough. The world spotlight is on Washington to make the first move.