the China Lightroom blog

The heading of this blog entry might suggest I am about to write something political.  That’s not my intention.  My hope is to give an objective view into this issue so we all can be more educated – so that we don’t become lemmings to the media in their quest to get us to go blame somebody.

With the bailout of banks and U.S. corporations like GM, the 2009 U.S. budget is forecasted to have $1.7 trillion in deficit.  This adding to the roughly $11 trillion national debt accumulated thus far through George W. Bush’s term as president, Obama will take the U.S. national debt to $13 trillion and beyond.

A positive view on this is that the U.S. is borrowing heavily to finance its development.   Let’s say that the U.S. is able to remain dominant in some industry – for example, biotech (due to accelerated economic activity from borrowed money) – and through international patent laws and trade agreements, the U.S. will enjoy some type of “monopoly” in medical advances in the future.  Generating tremendous revenue from this industry enables the U.S. to easily pay back this huge debt.  Essentially, the U.S. has catapulted ahead of the world on borrowed money.  This is not a bad strategy.

This scenario could very well play out.  Another view is that the entire world would have grown so much, so $13 trillion in 1 or 2 decades could be very miniscule.  This enables Americans to maintain a luxurious standards of living meanwhile.

Before we go into the other views, we should understand the nature of this debt a bit more.  Of the $13 trillion, only about $2.7 trillion are owned by foreigners.  For example, China owns about $800 billion, Japan about $600 billion, and oil producing countries some significant amount with the rest in the hands of basically every other country on this planet.

The vast majority of the U.S. national debt is actually owned by the U.S. government itself.  (Here is an official document published by the U.S. Treasure Department:http://www.fms.treas.gov/bulletin/b2009-2ofs.doc)

According to the U.S. Treasury, the U.S. government owns majority of its own debt.  Come again? How is that possible?

It turns out, the U.S. government has been taking money out of Social Security, Medicare, and other public trust funds to finance its own debt.  In plain English, it means what little of the American public’s savings are now spent.  On social security – if the 30 to 40-somethings clearly believe that Social Security will be bankrupt by the time they retire, then the situation might be “workable.”

I, for one, believe that I cannot count on Social Security when I retire.  Do you believe the same?  If so, then chances are this bankrupt social security issue is already becoming a non-issue.

Some would say that this is democracy going amock.  Different factions within society cannot rise above their own special interest.  If there is any cut in spending, it’d better come from some other groups!

This is a problem both at national level and at state level.  For example, California is going through a state budget crisis.  Every faction of society is fighting tooth-and-nail to hold onto their piece of the pie – nevermind the deficits!

Another consideration for this U.S. national debt is obviously trade imbalance.  Since about the early 1990′s, the U.S. has always run a trade deficit with China.  The nominal amount is always in dispute between the Chinese government (claiming less) and the U.S. government (claiming more).

(Interesting graphical representation of historic trade deficits for the U.S. and her trading partners: http://www.brightpointinc.com/flexdemos/ustrade/ustradedeficit.html)

If we add up U.S.’s official numbers, U.S.’s trade deficit with China accumulated over the last few decades totals a bit over $1 trillion.  This is significant.  If we consider the $13 trillion today, the bulk of the national debt is obviously the uncontrolled spending.  Well, if we throw in Japan and some other countries, total trade deficit is indeed significant, so don’t take that significance lightly.

We have heard about the Fed printing USD 24×7 nonstop, and how does that work?  First of all, when the media or politicians talk about currency manipulation, they are talking nonsense.  Otherwise printing money is the most blatant form of currency manipulation.

Politicians and media speak that way because they are interested in diverting blame or to get us paranoyed, respectively.

Printing more USD is guaranteed to inflate the USD – which means each USD is worth less in terms of material goods it can buy.  (Historically, in times of inflation, buying real property or precious metals like gold is a good bet!)  Coudn’t the U.S. government print $800 billion in secret to pay back the Chinese?  Couldn’t it do the same to Japan with another batch of $600 billion?

Thanks to my good friend, Albert, he’s got a good explanation.  It turns out, it doesn’t matter how secret a government is when printing their currency.  The international currency market is very fluid and efficient – it will converge on the true value in no time – especially for a world currency like the USD.

So, whatever the amount of USD the U.S. government prints, the value of every single USD in existence in the universe is diluted in value proportionally by how much more was put into circulation.

Can the Chinese and Japanese governments “protect” their debt holdings from this inflation?  Only to some extent.  The Chinese government is hording commodities – raw materials factories need to make goods.  Using U.S. debt to pay for commodities is a means to offload some of the inflationary effects.  However, China still maintains a positive trade balance with the U.S., and thus still accumulating U.S. debt, and the overall remains similar to the recent past.  (In other words, no Chinese policy change towards the U.S..)

If you managed to read this far, then the only thing I can say is there’s a lot of food for thought on this issue.  The relationship between the U.S. and China is deep and complicated.  People should not put “morality” on it.  We should resist on being turned into lemmings.  That’s my conclusion.  I am sorry if you were hoping for something more insightful.