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China’s Holdings of U.S. Securities: Implications for the U.S. Economy

12/27/2011

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Warnings from the Congressional Research Service Report: Sept 26, 2011
>U.S. reliance on foreign savings is not sustainable and may undermine U.S. economic interests over time.
>Turning away from the dollar as the world's reserve currency causing a sudden and large depreciation in the value of the dollar, as the supply of dollars on the foreign exchange market increased, and a sudden and large increase in U.S. interest rates.
>Should Washington continue turning a blind eye to its runaway debt addiction, its already tarnished credibility will lose more luster, which might eventually detonate the debt bomb and jeopardize the well-being of hundreds of millions of families within and beyond the U.S. Borders.

Excerpts from
The Congressional Research Service Report

China’s Holdings of U.S. Securities: Implications for the U.S. Economy

The complete report can be found here. http://www.fas.org/sgp/crs/row/RL34314.pdf

Growing Bilateral Tensions over the U.S. Public Debt

Since the beginning of the global financial crisis in 2008, U.S. government officials have increasingly sought to offer assurances to Chinese officials regarding the safety of China’s holdings of U.S. government debt securities and to encourage China to continue to purchase U.S. securities. For example, during her first visit to China on February 21, 2009, Secretary of State Hillary Rodham Clinton was quoted as saying that she appreciated “greatly the Chinese government's continuing confidence in the United States Treasuries,” and she urged the government to continue to buy U.S. debt.26 However on March 13, 2009, Chinese Premier Wen Jiabao at a news conference stated: “We’ve lent a huge amount of capital to the United States, and of course we’re concerned about the security of our assets. And to speak truthfully, I am a little bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."27 On March 24, 2009, the governor of the People’s Bank of China, Zhou Xiaochuan, published a paper calling for replacing the U.S. dollar as the international reserve currency with a new global system controlled by the IMF.28

The recent contentious U.S. debate over raising the debt ceiling and over how to address long- term U.S. debt issues, along with the downgrade of the long-term sovereign credit rating of the United States from AAA to AA + by Standard and Poor’s in August 2011, appear to have intensified China’s concerns over its U.S. debt holdings.29 Several government-controlled Chinese newspapers issued sharp criticism of U.S. economic policies (as well as the U.S. political system). For example:

• A July 28, 2011, Xinhua News Agency (Xinhua) editorial stated: “With its debt approximating its annual economic output, it is time for Washington to revisit the time-tested common sense that one should live within one's means.”

• An August 3, 2011, a Xinhua editorial stated: “Should Washington continue turning a blind eye to its runaway debt addiction, its already tarnished credibility will lose more luster, which might eventually detonate the debt bomb and jeopardize the well-being of hundreds of millions of families within and beyond the U.S. borders.”

• A Xinhua August 6, 2011, editorial said: “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone. International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”

• A Xinhua editorial on August 8, 2011, stated: “The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor's (S&P) for the first time on Friday. China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.”

Some analysts contend that China’s main concern is not a possible U.S. default on its debt, but rather U.S. monetary policies that have been utilized by the Federal Reserve in recent years to stimulate the economy, namely the purchases of U.S. Treasury securities, agency debt, and agency mortgage-backed securities. Such measures, often referred to as “quantitative easing” (QE), have led the Federal reserve to purchase over $2 trillion in U.S. securities since March 2009 in an effort to lower long-term interest rates.32 An August 25, 2011, editorial in China Daily stated that

“China is not worried that Standard & Poor's has downgraded the U.S. credit rating from AAA to AA+. Rather it is concerned about the Fed announcing QE3. If the U.S. administration chooses to make the irresponsible choice of devaluating the dollar further, China would not only stop buying U.S. debt, but also gradually decrease its holdings, which would certainly not be in the interests of the U.S.”

Chinese officials have expressed concerns that actions by the Federal Reserve to boost the U.S. money supply will undermine the value of China’s holdings of U.S. dollar assets, either by causing the dollar to depreciate against other major currencies or by significantly increasing U.S. Inflation.

Some Chinese analysts have argued that the debt problems in Europe and the United States will decrease their demand for Chinese products, and that a depreciating dollar will lower the value of Chinese dollar assets. Thus, they argue, China will need to accelerate its economic reforms in order to boost domestic consumption (including increased imports), lower its dependency on exporting for economic growth, and slow or reduce China’s FX reserves and holdings of U.S. securities. If China consumed more and saved less, it would have less capital to invest overseas, including in the United States. Thus, if the United States did not reduce its dependence on foreign savings for its investment needs (and borrowing for deficit spending), and China reduced its U.S. investments, the United States would need to obtain investment from other countries, and the overall U.S. current account balance would likely remain relatively unchanged but U.S. interest rates would be expected to rise.

A potentially serious short-term problem would emerge if China decided to suddenly reduce their liquid U.S. financial assets significantly. The effect could be compounded if this action triggered a more general financial reaction (or panic), in which all foreigners responded by reducing their holdings of U.S. assets. The initial effect could be a sudden and large depreciation in the value of the dollar, as the supply of dollars on the foreign exchange market increased, and a sudden and large increase in U.S. interest rates, as an important funding source for investment and the budget deficit was withdrawn from the financial markets.

Many analysts argue that heavy U.S. reliance on foreign savings is not sustainable and may undermine U.S. economic interests over time.

Posted By:  Stephen McElr
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More Bailouts?

4/22/2010

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The Restoring American Financial Stability Act of 2010, Senate Bill 3217, scheduled to hit  the Senate floor this Friday, April 23. This bill is Senator Chris Dodd’s solution to the “too big to Fail problem.” It will create bailouts forever by creating a new $50 Billion fund that will be used for restructuring companies that would close due to bankruptcy. We do not need more bailouts. Contact Senators Byrd and Rockefeller today and ask them to oppose Senate Bill 3217.

Senator Byrd

Telephone:  (202) 224-3954

Fax:  (202) 228-0002

 

Senator Rockefeller

Telephone:  (202) 224-3954

Fax:  (202) 228-0002

 

Please, join us in front of Senator Rockefeller’s Fairmont office Monday, April 26 at NOON. Bring your signs and enthusiasm. We want Sen. Rockefeller to know bailouts hurt, freedom works!

 

The office is located at:

118 Adams Street
Suite 301
Fairmont, WV


 

The following good articles about this bill:

http://blog.heritage.org/2010/03/26/morning-bell-dodd-bill-creates-permanent-tarp-and-you-can-quote-that/

http://blog.heritage.org/2010/04/13/how-to-create-bailouts-forever/

http://www.redstate.com/jimbo51/2010/04/18/hidden-danger-in-dodd-financial-reform-bill/


By: Laura Kennedy
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There is Always Something We Can Do

6/16/2009

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It is wonderful to be in the greatest nation in the world. I am thankful to have been born in the United States of America. However, with the government takeover of the banking and car industries, with czars that are accountable to no one except the president, with a tax system that stifles opportunity, and with a mountain of debt that we will be passing on to our children’s children, the future of the country looks bleak. In this situation, we could find ourselves asking, “Why me?” We could find ourselves saying, “All hope is lost.” We can choose to say, “There is something I can do!” We can choose to say, “I was born for such a time as this, so I will stand up and take my nation back!”

This is still the land of the free and the home of the brave.   We still have the freedom to speak out and let our beliefs be heard. We still have the freedom to choose our leaders. We still have the freedom to say, “We’ve had enough!”  The well being our children hangs in the balance. If we want our children to enjoy the freedom we have enjoyed, we must speak out. If we want our children to enjoy the freedom for which so many people have fought and died, we must speak out. Are we brave enough to take a stand for the future this nation? I think we are.

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Disease that Could Plague Generations

5/4/2009

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Last week we were all watching the “swine flu.” Of course, we watched. We do not want a deadly disease to afflict us or our children, but there is a deadly disease that is afflicting our country, debt. We must remain vigilant concerning this disease that could affect countless people over multiple generations. This week congress passed a budget of $3.4 trillion with $1.2 trillion in deficit spending.  Deficit spending is added to our national debt. We need to not just cut our deficit spending we need to completely eliminate it. How can we continue to spend more money than we make and ever have the hope of getting out of debt? If we never get out of debt, our children will pay for our reckless spending.  Let’s start by not adding expenses like bailing out failing companies. Chrysler was considered “too big to fail.” Last week, while we were all watching the swine flu it was announced that Chrysler went into bankruptcy. We bailed Chrysler out and the company still failed. I have learned from experienced parents that if you continually bail your children out they will continue to fail. This has got to stop we must let some companies fail so we can all learn how to succeed. Let’s keep a watchful eye on our government and make sure we do not miss what is happing in Washington by being blinded by fear.

Find out how your Representative voted on the budget.

http://clerk.house.gov/evs/2009/roll216.xml

Find out how your Senators voted on the budget.

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=1&vote=00173#position

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Stop the Bailouts

4/30/2009

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Chrysler is filing for bankruptcy and what is our government doing, giving handing them another $8 billion of our money.  It is not the governments job to bailout these companies. It is not the taxpayers job to bailout these companies. I did not choose to give the government my money to bailout failing businesses. I will not let them do it anymore. I will not vote for elected representatives who support bailouts. The real revolution happens at the ballot box.  Start finding out how your elected representatives vote and look for candidates who support what you believe in.  Together we will take our nation back and we will secure the future of our nation for our children and grandchildren.

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Freedom Works; Bailouts Hurt

4/13/2009

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I think of Easter as a celebration of freedom. This reminds of the reason our forefathers founded this country. They had experienced the government exerting control over the people and they did not like it. Our country was founded on freedom, but we have become accustom to giving freedom up for bailouts, whether it is personal bailouts providing for people who do not work or business bailouts for companies that have failed. Whenever the government starts handing out money, someone looses freedom. As a taxpayer, I lose the freedom to live the American dream of prosperity. The companies we are bailing out lose freedom, as well. Just ask the former CEO of GM. What did GM get from the bailout and what did the taxpayers get for the money spent on GM’s bailout? GM is preparing to file for bankruptcy by June 1. Where is our money going and what is happening in the land of the free and the home of the brave? I will tell what is going to happen. On Wednesday, we, the people of the United States of America, are going to let their voices be heard. We will send a message to Washington. We will take our country back!
 

See story GM's Bankruptcy
http://www.foxnews.com/story/0,2933,514823,00.html





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Those Who Work Eat

4/3/2009

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Those who work get to eat. A society that adopts this philosophy prospers. In order to prosper, we have to be a productive society. How are we going to be a productive society when we take money away from our top producers and give it to those who are not producing at all? I do support those who help people in trouble, but this an area of personal responsibility, not government control. As we have seen with the auto companies, when we accept money from the government we give up control. The United States is suppose to be a free society not a controlled society. We want to take responsibility for ourselves and decided to help our neighbors when they need help, as they help us. We do not want to support slothfulness and feed a draining society. We want a society that rewards hard word and does not chase foolish fantasies of spending money we do not have.

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