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Enough Rope

February 4, 2010

My post the other day (click to read) dealt with our huge national debt, how it is no longer a debt we owe ourselves but one we owe to other governments.  Events over the last week brightly illustrate how this affects our foreign policy and ultimately gives control of our economy to other countries, China for example.

According to the U.S. Treasury, we owe China nearly one trillion dollars.  We owe other countries vast sums too, but China holds a larger portion of our debt than any other country.  Moreover, China manufactures a large portion of the goods imported into the United States.  Some economists and political scientists  feel that countries trading goods and owing money to each other provides stability and prevents war.  The theory states economies that are interdependent guide the political process.  Unfortunately, this does not apply evenly to China.  Our relationship is lopsided at best.  While it would hurt China economically to use tools like sanctions to influence U.S. policy, the resulting damage to our own would be much worse.

Last week China began to push the specter of sanctions on Boeing for their involvement in weapons sales the United States government plans with Taiwan.  Although the proposed sale was arranged over two years ago, the government of China picked a time when the United States is viewed as venerable economically to raise the issue.  In other words, they are using our economic troubles as leverage over us.  Regardless, if this is deliberate or just a coincidence, it does not matter; it shows how a foreign government can influence U.S. policy towards a long-standing trading partner for their own gain.

Sanctions are only the first step the government of China has open to them.  We must remember that China does not have a capitalist system of democracy.  The government has direct control of most aspects of commerce and production of goods.  If sanctions do not work, they have the ability to raise prices on the cost of manufacturing further putting pressure on our economy.  If that fails, they still have the economic equivalent of nuclear weapon to throw at us – sell off the U.S. Treasury Bonds they hold for a loss.  Other countries would follow suit for their own protection, leaving the U.S. economy in ruins.  Granted, this is the “worse case” scenario but it is a possibility given the position we are in.

It is time for the United States to reduce the level of foreign investment in our debt.  It creates too great an advantage for other nations.  We do not hold substantial foreign debt of other countries, leaving us with no defense from this weapon – none.  The communist leader Vladimir Lenin said it best, “The Capitalists will sell us the rope with which we will hang them.”  In this case, we sold the Chinese the debt they will cripple our economy with.

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