Democrats’ Debt Hole Leads to China

China’s Offer to Bail Out Europe Offers a Frightening Glimpse of the Future Under Democrats’ Borrow and Spend Policies

• With Europe’s debt crisis escalating, China last week offered to “help” with a bailout that would put Europe on the hook to China while extracting steep concessions in trade benefits that would hurt Europe’s exporters.
• Europe’s predicament could offer a glimpse of what is in store for America if Democrats continue borrowing from countries like China to pay for more failed stimulus spending. China owns more than $1 trillion in U.S. debt, at least as far as we know since Obama’s Treasury lost track of exactly how much of our debt China owns.  
• Democrats and President Obama dug our nation a $4 trillion debt hole in just more than two years—the fastest increase in the national debt under any president—but Democrats are proposing even more stimulus spending. Meanwhile, a mountain of economic studies suggest that America’s high debt levels are hurting our economic growth.

BACKGROUND

With Europe’s debt crisis escalating, China last week offered to “help” with a bailout that would put Europe on the hook to China while extracting steep concessions in trade benefits that would hurt Europe’s exporters:

CHINA OFFERS TO BAIL OUT EUROPE, BUT AT A PRICE: “If China is going to help ease Europe’s financial crisis, silken strings could be attached.

“Premier Wen Jiabao on Wednesday offered to help Europe. But, in an unprecedented move for China, he linked the offer to a potentially onerous demand: that Europe renounce its main legal defense against low-priced Chinese exports.” (Keith Bradsher, “China Ties Aiding Europe to Its Own Trade Goals,” The New York Times, 9/15/2011)

CHINA WOULD REQUIRE EUROPEAN UNION TO GRANT THEM SPECIAL TRADE STATUS AT THE EXPENSE OF THEIR EXPORTERS: “Mr. Wen urged the European Union to classify China as a ‘market economy’ instead of a ‘nonmarket economy.’

“In international trade legalese, the new designation would make it almost impossible for Europe to impose tariffs on Chinese goods considered unfairly cheap.”(Keith Bradsher, “China Ties Aiding Europe to Its Own Trade Goals,” The New York Times, 9/15/2011)

Europe’s predicament could offer a glimpse of what is in store for America if Democrats continue borrowing from countries like China to pay for more failed stimulus spending. China owns more than $1 trillion in U.S. debt, at least as far as we know since Obama’s Treasury lost track of exactly how much of our debt China owns:

CHINA “CAUGHT” WHILE “BUYING MORE [U.S.] DEBT THAN DISCLOSED”: “When the Treasury Department revamped its rules for participating in government bond auctions two years ago, officials said they were simply modernizing outdated procedures.

“The real reason for the change, a Reuters investigation has found, was more serious: The Treasury had concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open – all without ruffling feathers in Beijing. …

“The incident calls into question just how clear a handle the Treasury has had on who is buying U.S. debt. Chinese entities hold at least $1.115 trillion in U.S. government debt, and are thought to account for roughly 26 percent of the paper issued by Washington, according to U.S. government data released on June 15.” (Emily Flitter, “U.S. Caught China Buying More Debt than Disclosed,” Reuters, 6/30/2011)

REVELATIONS RAISE SECURITY CONCERNS: “China’s vast Treasury holdings are both a lifeline and a vulnerability for Washington – if the Chinese sold their Treasuries all at once, it could undermine U.S. markets and the economy by driving interest rates higher very quickly. Scenarios of this sort have been discussed in Washington defense-policy circles for at least a year now. Not knowing the full extent of these holdings would make it even more difficult to assess China’s political leverage over U.S. finances.

“The Treasury has long said that it has a diversified base of investors and isn’t overly reliant on any single buyer to digest new U.S. Treasury issuance. Evidence that China was actually buying more than disclosed would cast doubt on those assurances.”(Emily Flitter, “U.S. Caught China Buying More Debt than Disclosed,” Reuters, 6/30/2011)

Democrats and President Obama dug our nation a $4 trillion debt hole in just more than two years—the fastest increase in the national debt under any president—but Democrats are proposing even more stimulus spending:

“NATIONAL DEBT HAS NOW INCREASED $4 TRILLION ON PRESIDENT OBAMA’S WATCH.” “The latest posting by the Treasury Department shows the national debt has now increased $4 trillion on President Obama’s watch. The debt was $10.626 trillion on the day Mr. Obama took office. The latest calculation from Treasury shows the debt has now hit $14.639 trillion.” (Mark Knoller, “National Debt Has Increased $4 Trillion Under Obama,” CBS News, 8/22/2011)

OBAMA DEBT BURDEN “THE MOST RAPID INCREASE IN THE DEBT UNDER ANY U.S. PRESIDENT.” (Mark Knoller, “National Debt Has Increased $4 Trillion Under Obama,” CBS News, 8/22/2011)

FLASHBACK TO JULY 2008: OBAMA SAYS “IT’S UNPATRIOTIC” THAT BUSH “ADDED $4 TRILLION BY HIS LONESOME”: “The problem is, is that the way Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt from $5 trillion for the first 42 presidents – #43 added $4 trillion by his lonesome, so that we now have over $9 trillion of debt that we are going to have to pay back — $30,000 for every man, woman and child. That’s irresponsible. It’s unpatriotic.” (“Flashback: Obama: Adding $4 Trillion to Debt is Unpatriotic,” Real Clear Politics, 8/24/2011)

PRICETAG FOR SON OF STIMULUS: $450 BILLION. “It’s fairly clear what the plan would cost. Though the price tag has not yet been officially tabulated by the Congressional Budget Office, private economists have come up with back-of-the-envelope estimates of about $450 billion.” (John Schoen, “Obama Plan to Pay for Jobs Program Murky,” MSNBC, 9/12/2011)

Meanwhile, a mountain of economic studies suggest that America’s high debt levels are hurting our economic growth:

NEW STUDY UNVEILED AT FED CONFERENCE SAID HIGH PUBLIC DEBT WILL “SAP GROWTH FROM THE ECONOMY”: “While much of the coverage of last week’s central banker boondoggle in Jackson Hole, Wyo., has focused on Federal Reserve Chairman Ben Bernanke appearing to scold Republicans for resisting raising the debt ceiling, one of the more important papers revealed that the hardcore Republican argument is essentially right: Public debt is so high that it is restricting growth. … Its authors—a trio of economists from the Bank for International Settlements—demonstrate that when government debt reaches beyond a certain threshold it begins to sap growth from the economy.

“Government debt beyond a threshold ranging from 80 to 100 percent of gross domestic product (GDP) begins to thwart growth. Exactly where that threshold lies depends on a number of factors, including whether or not there is a banking crisis. A 10 percentage point increase in the ratio of public debt to GDP is associated with a 0.17 percent to 0.18 percent reduction in subsequent average annual growth.” (John Carney, “From Jackson Hole: A Defense of Debt Ceilins,” CNBC, 8/29/2011)

BAD NEWS: AMERICA IS ALREADY PAST THE DEBT DANGER ZONE OF 100% OF GDP; TRANSLATION: AMERICA OWES MORE THAN THE SIZE OF THE ECONOMY.“US debt shot up $238 billion to reach 100 percent of gross domestic project after the government’s debt ceiling was lifted, Treasury figures showed Wednesday. …

“The new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, and putting it in a league with highly indebted countries like Italy and Belgium.” (“U.S. Borrowing Tops 100% of GDP: Treasury,” Agence France Press, 8/3/20111)

ANOTHER MAJOR ECONOMIC STUDY LINKED DEBT OVER 90% OF GDP TO SLOWER ECONOMIC GROWTH: “The sharp run-up in public sector debt will likely prove one of the most enduring legacies of the 2007-2009 financial crises in the United States and elsewhere… Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes… Seldom do countries simply ‘grow’ their way out of deep debt.” (Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” American Economic Review Papers and Proceedings, 12/31/2009)

AND GOLDMAN SACHS RESEARCH: “A DEFICIT-FINANCED BOOST TO GROWTH WILL EVENTUALLY LEAD TO A DRAG.” “The eventual effect of sustained fiscal imbalance is slower growth and greater risk of a fiscal crisis.  Our estimates suggest that a 10-point increase in the debt/GDP ratio lowers growth four years later by 0.2 percentage point, and increases the probability of a debt crisis by 2.5% in the aftermath of a financial crisis like the recent one.  (See No Rush for the Exit,” Global Economics Paper, No. 200, June 30, 2010 and “When One Crisis Leads to Another,”US Economics Analyst, 11/04, Jan. 28, 2011.)  To avoid this, lawmakers must begin to identify deficit reduction strategies.

“Ultimately, what goes up must come down. In the case of the federal budget, this means that a deficit-financed boost to growth will eventually lead to a drag. While policymakers can try to smooth the transition by phasing in cuts and incorporating multi-year fiscal commitments, achieving a sustainable fiscal policy will inevitably be a painful but necessary process.” (Jan Hatzius and Alec Phillips, “Fiscal Restraint: A Question of When, Not If,” Goldman Sachs Global ECS U.S. Research, 3/2/2011)