from Follow the Money

Not the usual way to describe your biggest creditor …

February 3, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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According to the Financial Times, the Pentagon sees China as the United States greatest potential rival.

"China has the "greatest potential to compete militarily" with America in the future, but the US is also increasingly worried about Russian arms sales, the Pentagon said in major review of military priorities. Underscoring mounting concerns about the rise of China, the highly anticipated quadrennial defence review [QDR] focuses on the potential future threat from a Chinese military build-up that "already puts regional military balances at risk."

The Pentagon plots how to contain China using money that the US Treasury raises by selling bonds to China.  Tis a strange world we live in.

No one played a bigger role financing the 2005 US current account deficit than China's central bank.   Rather than advocating new weapons systems, maybe the US top brass should be advocating for new taxes, so the US government isn't so financially dependent on China, Saudi Arabia and Russia.  National power has many components.

John Gray's commentary on the financial achilles heel that underlines America's hegemony seems relevant:

The Case for Goliath
is an eloquent statement of the vital role of America in twenty-first-century global security. Yet the picture it presents of America's unchallenged hegemony passes over some awkward facts. Unlike Britain in the nineteenth century, which was the world's largest exporter of capital, the United States is the world's largest debtor. In effect America's military adventures are paid for with borrowed money—notably that lent by China, whose purchases of American government debt have become crucial in underpinning the US economy. This dependency on China cannot easily be squared with the idea that the US is acting as the world's unpaid global enforcer. It is America's foreign creditors who fund this role, and if they come to perceive US foreign policy as dangerously threatening or irrational they are in a position to raise its costs to the point where they become prohibitive. As Emmanuel Todd, the French analyst who, in 1975, forecast the impending Soviet collapse, has noted:
The United States is unable to live on its own economic activity and must be subsidized to maintain its current level of consumption—at present cruising speed that subsidy amounts to 1.4 billion dollars a day (as of April 2003). If its behavior continues to be disruptive, it is America that ought to fear an embargo.

Given that it would also harm America's creditors the likelihood of such an embargo may be remote, but it is no longer unthinkable.

I have long been puzzled why those who believe America must go it alone and not allow any country a veto over US foreign policy have been relatively unconcerned by the United States growing financial dependence on the rest of the world, and a few countries in particular.   I think part of the answer is that most folks in the US don't see if as dependence.   As my friends at the US Treasury like to say, we aren't asking anyone to build up their reserves and buy Treasuries.

But that doesn't mean that the end of this existing financial subsidy would be painless.  Paying for your imports with exports is rather different than paying for them with credit.    And there might be some impacts on the housing market (and housing jobs) too.

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