Why China dumping US debt could be great for America
If there wasn't a market for its debt, the US would have to address its spending addiction.
If China was to turn off American access to credit 鈥� a symbolic cutting of the credit cards, as seen here 鈥� the US would have to deal with its addiction to debt.
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Providing the world鈥檚 reserve currency has its privileges. Not the least of which is the continued willingness of foreigners to soak up the massive amounts of debt issued by the US despite the nation鈥檚 continued debasement of the dollar.
Yet, what if the foreign nations stopped buying? We鈥檝e certainly heard of the calamity that should result from China cutting the US off, but perhaps we shouldn鈥檛 be so certain that鈥檚 the case.
Let鈥檚 suppose for a minute that it鈥檚 not. Mike Cosgrove investigates an eye-opening upside of a US without a market for its debt.
From Investor鈥檚 Business Daily:
鈥淭he Chinese and Japanese are our friends for two reasons: (1) Their net purchases help keep bond yields low, and (2) Chinese warnings about not buying more Treasuries or in fact selling Treasuries can send shock waves through capital markets.
鈥淐ongress and the Obama administration don鈥檛 seem overly concerned with huge federal deficits. But the administration does understand the crisis that would be created in capital markets were the Chinese to become net Treasury sellers, even for a short period of time.
鈥淭he Chinese can act as a constraint on the reckless federal spending of Congress and the administration. In fact, the Chinese may be the only realistic constraint in 2010鈥�
鈥溾�he Chinese can lecture the administration about excessive federal outlays, but nothing would be more effective than dumping Treasuries, even for a short time. Such action would panic investors, and as a result the administration may well agree to constrain spending to placate the Chinese.鈥�
In the scenario Cosgrove plays out, China has the potential to act like a caring relative who, familiar with the Alcoholics Anonymous process, is ready to perform an intervention. It鈥檚 hardly a painless process, but perhaps the US debt market needs to hit rock bottom before the administration will walk the road to recovery.
You can read more about Cosgrove鈥檚 theory in an Investors.com editorial on .
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