As the previous decade was coming to a turbulent close, James Fallows, the veteran journalist, penned a trio of important articles. The first, “The $1.4 Trillion Question,” published in January 2008, was among the first to look at the rising levels of US debt being gobbled up by China, who by September of that same year would surpass long-time leader Japan as the United States’ single largest purchaser of US treasury securities (source). Fallows described the 2000s this way:
In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.
When China overtook Japan, in September of 2008, China held just over $600 billion in US treasuries. Today, according to official data, China holds more than twice that: almost $1.3 trillion in US government bonds alone. This doubling, from 2008-2013, occurred during a rough five years that included: a financial crisis; a severe recession; a lackluster economic recovery; a poorly solved “fiscal cliff”; and not least, 2011’s debt-ceiling default showdown, in which one of the US’s two major political parties publicly put credit default on the table, as a negotiating ploy, designed to get what it wanted from the opposite party and its incumbent president. Indeed, the result of the debt-ceiling showdown, a year-and-a-half later, was 2013’s fiscal cliff solution, better known around town as the “Sequester,” which triggered significant government spending cuts that no one seems to like but everyone seems to agree have put a further damper on the lackluster recovery.
It seems, then, that the US hasn’t been overly concerned with how its actions might come to be interpreted by its creditors. Or shown much concern with how its creditors interpret their own self-interests. Which brings us to Fallows’ second article, published in December of 2008. It was an interview with Gao Xiqing, who was and is president of the China Investment Corporation. Indeed, Xiqing used the interview to offer a simple but meaningful statement to his US audience, which The Atlantic turned into a headline: “Be Nice to the Countries That Lend You Money.” Xiqing’s polite interlocution seemed to suggest that, contrary to conventional analysis — which sees China’s interests as tied up in US debt, as much, or more than US interests are tied up in Chinese savings; see this for example — China’s actual position is that its US debt purchases should be seen as contextual: there are in fact things the US can do to ruin this economic interaction and to undercut the attractiveness of US bonds. Xiqing put it this way:
The overall financial situation in the U.S. is changing, and that’s what we don’t know about. It’s going to be changed fundamentally in many ways.
Think about the way we’ve been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it’s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.
People, especially Americans, started believing that they can live on other people’s money. And more and more so. First other people’s money in your own country. And then the savings rate comes down, and you start living on other people’s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.
We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we’d love to support you guys—if it’s sustainable. But if it’s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living.
Notably, 2011 — the year of the debt-default showdown — was the first year on record in which China held fewer US treasuries at the end of the year than they held at the start of the year. There is not yet proof this reflects a change in China’s investment strategy, and indeed 2013 data shows an increase in China’s holdings. But this startling fact remains: China hit its peak of US bond holdings in July 2011 (the month before the debt-ceiling debacle ended), and has yet to return to that level even today, as I write this, in late September 2013.
Data also suggest the 2011 debt-default showdown led to domestic consequences as well. Writing in 2012, the well-respected economists Justin Wolfers and Betsey Stevenson pointed out that “[g]rowth in nonfarm payrolls decelerated to an average 88,000 a month during the three months of the debt-ceiling impasse” and that “[o]ver the entire episode, confidence declined more than it did following the collapse of Lehman Brothers.”
What are the potential outcomes this time, as the US political system sits on the precipice of another debt-deiling showdown? Here, New York Times journalist Annie Lowrey’s offers her best guess:
[A] breach of the debt ceiling and the ensuing market gyrations might cost hundreds of billions, perhaps more.
For one thing, it would raise the United States’ borrowing costs, with investors demanding more in exchange for their cash. How much more, we do not know. But a 0.5 percentage point increase in Treasury rates — from 3 percent to 3.5 percent, for instance — would eventually cost about $75 billion a year.
It would seem, then, that not only is putting the debt-ceiling on the table bad for US creditors, it is equally irrational as domestic policy. Which brings us, finally, to Fallows’ third article, this time from January 2010, titled “How America Can Rise Again.” The thesis this time is that, while the US retains significant international advantages, an “alarming problem” remains: “our governing system,” Fallows put it, “is old and broken and dysfunctional” and “[f]ixing it —- without resorting to a constitutional convention or a coup —- is the key to securing the nation’s future.”
Fallows’ article makes the case for political reform. Based on what we know, President Obama’s steadfast refusal to negotiate over the debt-ceiling is a good start. The data suggest Obama’s taking the debt-ceiling off the table is good for the country’s creditors abroad, and good for its citizens at home. Let us hope the GOP gets the message.