National Debt When Capitalism Strikes

National Debt

When Capitalism Strikes Back: The Issue of the United States' Foreign Debt to China and Economic Turmoil

The recent global economic crisis that began largely -- almost entirely, according to some views -- in the United States as a result of several different unregulated business practices and questionable debt and asset shifting has led many to question certain underlying principles and facts of the global economic situation. One of the most pressing of these issues, for the United States especially, is the amount of foreign debt owed by consuming countries to those that are still more geared towards production. One of the most extreme examples of such a trade deficit is that which exists between the United States and China. In terms of both private investment and government purchasing of securities and bonds -- essentially loans to the federal government -- the amount of U.S. debt that China holds has the potential to create major economic upheaval in the United States and the world over, and it is very likely to do so unless this debt is significantly reduced and greater balance is achieved.

The Creation of Foreign Debt

Though in some ways the issue of foreign debt is relatively straightforward and simple, some aspects of China's ownership of United States' debt are ore complex. This has made it difficult for experts and officials to determine exactly how much debt China owns in the way of Treasury securities especially, and other forms of investment as well (Dickson 2010). Determining how this debt accumulated and its true extent is a necessary aspect of understanding the problem of this debt.

According to statements released by the United States Treasury department at the end of last year, China held over seven-and-a-half billion dollars worth of Treasury securities, but most economists and analysts insist that this hugely undervalues the of actual holdings by the Chinese (Dickson 2010). By placing funds in foreign banks and then using those funds to purchase additional U.S. Treasury securities, China has greatly extended its holding of U.S. foreign debt; this has been especially true with certain London banks serving as intermediaries in the past year (Dickson 2010). China also considers the exact makeup of its considerable foreign reserves -- which have an estimated value of nearly two-and-a-half-billion dollars -- a state secret, but it is estimated that as much as seventy percent of this reserve is in U.S. bonds, bringing the total ownership of U.S. debt by China to well over one trillion dollars (Dickson 2010). Continued investment through other foreign intermediaries and secrecy in their holdings not only makes the Chinese government's exact holding in terms of U.S. debt impossible to accurately state, but also increases the degree of imbalance in the economic powers that the nations hold over each other (.

The undervaluation of the yuan, which is artificially depressed to an approximated twenty-five to forty percent below its natural value by the Chinese government, also greatly increases the disparity in the amount of U.S. debt that China holds (Dickson 2010; Xin 2009). China plans to continue holding U.S. debt as a solid future investment, which will only serve to increase the debt imbalance still further (Xin 2009). The potential for future turmoil is also mounting.

The Problem of Debt Disparity

At first glance, it might not be apparent why the major disparity in the levels of debt held by the United States and China is such a problem and a potential cause for future economic turmoil. The continued investment of China in U.S. Treasury notes and bonds, as well as the private investment of Chinese wealth in U.S. businesses, helps to fund government and business activities in the U.S., sustaining both social programs and economic growth in the country. This is an incredibly short-term view of the situation, however, and does not take into account the eventuality of China recalling its debt from the United States when it falls due. When this occurs, the United States could find itself in the very uncomfortable position of owing China far more than it can repay, and even making payments on this debt could severely hamper the United States' ability to carry out many of its operations and social programs, and could also place the country's economy at the mercy of foreign whims.

Despite assurances that it will continue to invest in U.S. bonds and securities, China has also indicated that it has concerns regarding the rising amount of U.S. foreign debt and its financial stability (Barkley & Solomon 2009). If these concerns become large enough, China might begin to call in more of its debt in an attempt to obtain what it can from what it may view as a poor long-term investment (Barkley & Solomon 2009). When this happens, the economic outlook for the United States in the long-term will take a sudden downturn, and this could have a major impact on the global economy due to the United States' position within it.