Research Briefing

With Binge Spending Getting Worse, Obama’s Treasury Secretary Goes To Beijing To Mend Ties With America’s Largest Creditor

“Treasury Secretary Timothy Geithner Will Meet With Chinese Vice Premier Wang Qishan [In Beijing] Thursday … The Latest Indication That Strained U.S.-China Ties May Be On The Mend.” (J.R. Wu and Subhadip Sircar, “Geithner Plans To Meet China Vice Premier,” The Wall Street Journal, 4/7/10)

GEITHNER HEADS TO CHINA BECAUSE CHINESE, OTHER BUYERS OF OUR DEBT ARE WORRIED

China Is America’s Largest Foreign Creditor At Nearly $800 Billion, Or 23 Percent Of Our Total Debt. “Major Foreign Holders Of Treasury Securities (in billions of dollars) … China, 797.1 Grand Total, 3448.8.” (Simon Rogers, “Federal Deficit: Who Owns America’s Debt?,” The [UK] Guardian’s “Data Blog,” 11/2/09)

• And Economist Says Increasing Debt Places “Fate Of Our Economy” On America’s Creditors, Including China. “[W]e are paying an increasing proportion of this interest to foreigners rather than to our own citizens. A little more than half our debt is owned by people in other countries, primarily the Japanese and the Chinese … the present state of affairs perches the fate of our economy rather precariously on the opinion of other nations. If the Chinese decided … to curtail their financing of our debt, our financial markets would be spooked, and a stock-market crash and recession might not be far behind.” (Isabel V. Sawhill, “Ignoring Debt Makes It Get Worse,” The Philadelphia Inquirer, 4/30/06)

Last Year, Chinese Premier Demanded That Obama “Guarantee The Safety” Of American Debt After Expressing His Worries About Obama’s Deficits. “Exerting its new influence as the U.S. government’s largest creditor, China … demanded that the Obama administration ‘guarantee the safety’ of its $1 trillion in American bonds as Washington goes further into debt to combat the economic crisis. Chinese Premier Wen Jinbao made the demand at the end of the National People’s Congress in Beijing at a time when relations between the two nations show fresh signs of strain. ‘We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets,’ Wen said. “To be honest, I am definitely a little worried.’” (Anthony Faiola, “China Worried About U.S. Debt,” The Washington Post, 3/14/09)

Now China, Other Creditor Nations Selling American Treasuries, Part Of “Sustained Drop In Foreign Demand” For U.S. Debt.  “A record drop in foreign holdings of U.S. Treasury bills in December sent a reminder that the government might have to pay higher interest rates on its debt to continue to attract investors. China reduced its stake … The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009 … a sustained drop in foreign demand for dollar-denominated assets ...” (Martin Crutsinger and Bernard Condon, “Foreigners Cut Treasury Stakes; Rates Could Rise,” The Associated Press, 2/16/10)

THEY’RE WORRIED BECAUSE OF OBAMA’S UNPRECEDENTED BINGE SPENDING

“[F]oreigners, Especially The Chinese, Have Begun To Worry About Record-High U.S. Budget Deficits …” (Martin Crutsinger and Bernard Condon, “Foreigners Cut Treasury Stakes; Rates Could Rise,” The Associated Press, 2/16/10)

Obama’s Budget Projected To Make Debt $20.3 Trillion In 2020, Equaling 90 Percent Of GDP.  “Under the President’s budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020—$5 trillion above what CBO projects for 2020 in its baseline (see Figure 1-2).” (“An Analysis Of The President’s Budgetary Proposals For Fiscal Year 2011,” Congressional Budget Office, March 2010)

• President Of National Bureau Of Economic Research Says Budget Enters Into “Uncharted Waters.” “‘We’re in territory that’s essentially uncharted waters,’ James Poterba, president of the National Bureau of Economic Research, said in a Bloomberg Radio interview … ‘The long-term prospects in U.S. fiscal policy is rather daunting,’ said Poterba ...” (Roger Runningen and Brian Faler, “Obama Proposes $3.8 Trillion Budget Focused On Jobs,” Bloomberg, 2/1/10)

Obama Signed Government-Run Health Care Bill That David Broder Called A “Budget-Buster.” “While the CBO said that both the House-passed bill and the one Reid has drafted meet Obama’s test by being budget-neutral, every expert I have talked to says that the public has it right. These bills, as they stand, are budget-busters.” (David S. Broder, Op-Ed, “A Budget-Buster In The Making,” The Washington Post, 11/22/09)

• CBO Says That When You Take Out Democrats’ Double Counting Of Medicare And Social Security Savings, Obama’s Health Care Bill Actually Creates $260 Billion In Deficits Over The Next Decade. (CBO Director Douglas Elmendorf, Letter To Rep. Paul Ryan, 3/19/10)

AND AMERICANS WILL PAY THE PRICE IN HIGHER TAXES AND INCREASED DEBT SERVICE COSTS

Obama Economic Adviser Says National Sales Tax, Energy Tax Needed To Pay For Binge Spending. “Volcker … said the value-added tax ‘was not as toxic an idea’ as it has been in the past and also said a carbon or other energy-related tax may become necessary … he said getting entitlement costs and the U.S. budget deficit under control may require such moves. ‘If at the end of the day we need to raise taxes, we should raise taxes …’” (Steven C. Johnson and Leah Schnurr, “Volcker: Taxes Likely To Rise Eventually To Tame Deficit,” Reuters, 4/6/10)

• Both National Sales Tax, National Energy Tax Would Hit Poorest Americans Hardest. “Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor.”; “Low-income households bear a disproportionate burden of the costs associated with effective policies to reduce the use of carbon-based energy because they spend a higher proportion of their budgets on energy and energy-intensive goods and services than higher-income households do.” (Lori Montgomery, “Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look,” The Washington Post, 5/27/09; Chad Stone, Committee on Energy and Natural Resources, U.S. Senate, Testimony, 10/21/09, p. 1)

America Will Spend More On Debt Service “This Year Than Any Other Top-Rated Country.” “Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.” (Matthew Brown, “U.S., U.K. Move Closer to Losing Rating, Moody’s Says (Update1),” Bloomberg, 3/15/10)

• Increased Debt Services Costs Will Raise Interest And Mortgage Rates On Americans. “The selling in long-dated Treasuries has eased a bit this week, with the 10-year note’s yield moving off last week’s 3.934% level. Many market participants cautioned, however, that the yield could break the psychologically important 4% level, especially if the payroll report shows job growth that beats the forecasts of economists. A round of government debt auctions next week concentrating on the long end of the market could also push up bond yields, traders said. A significant push higher in the 10-year note’s yield, the benchmark for fixed-rated consumer and corporate borrowings, could lift mortgage rates further, raising concerns that it would undermine the recovery in the troubled housing market and consumer spending.” (Min Zeng, “Treasurys Weaken Ahead Of Jobs Data,” The Wall Street Journal, 3/30/10)
• And Might Move America “Substantially” Closer to Losing It’s AAA Credit Rating. “The U.S. and the U.K. have moved ‘substantially’ closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.” (Matthew Brown, “U.S., U.K. Move Closer to Losing Rating, Moody’s Says (Update1),” Bloomberg, 3/15/10)