Who will bankroll recovery in US?

Only-Way-4-Destiny! SG

As the global economic storm intensifies, many are wondering: How much will the United States borrow as it tries to recover? And who will lend it the money?

The answer will shape not only the future of the world's biggest economy but also the US' relations with key economic partners, particularly China.

This week, the US treasury plans to sell US$67 (S$1 trillion) in new securities as part of a borrowing binge that market analysts estimate could reach US$2.5 trillion in the financial year to September. The US$67 billion to be offered this week is more than half the size of Singapore's annual output - and that's just the beginning.

If the Obama administration's US$800 billion-plus package to create jobs is passed by Congress, a new and even bigger scheme to try to restore confidence in the financial system is expected to follow. Cost estimates of that measure range from US$1 trillion to US$4 trillion. The latter would be equivalent tf nearly one-third of US GDP.

Foreign investors, including China, Japan and other governments, hold more than half of the outstanding US$5.5 trillion Treasury debt. Will they keep buying the avalanche of US bonds when they need to spend more at home?

If overseas demand for the debt slides, interest rates in the US will rise, countering the efforts of the Federal Reserve to keep home mortgage payments in the depressed housing market low. Concerns about fast-growing US government debts have already pushed the yield on the benchmark 10-year Treasury note to 2.95 per cent, from just over 2 per cent at the end of December.

The US has become the world's top debtor state. Its overindulgence will have geopolitical as well as economic consequences. The sinews of US power are being weakened. So, too, is American influence in Asia and elsewhere. The US will almost certainly have to cut its military spending by 10 per cent or more. The defence budget rose by over 60 per cent during the eight years of the Bush administration, and will total at least US$612.5 billion this fiscal year. Meanwhile, the State department budget is a relatively paltry US$36 billion.

... Continued in next thread

Only-Way-4-Destiny! SG

The imbalance prompted Defence Secretary Robert Gates to call in November 2007 for "a dramatic increase in speding on the civilian instruments of national security - diplomacy, strategic communications, foreign assistance, civic action and economic reconstruction and development."

It might be thought that Beijing, viewed by some in Washingtong as astrategic competitor or even a potential enemy, would seek to hasten the relative decline of the US as global power. China is certainly in a position to do so, although only at great cost to the country itself. A recent study by the US council on Foreign Relations found that China held US$1.7 trillion in US investments at the end of last year, including close to US$900 billion in Treasury bonds and between US$550 and US$600 billion in US government agency bonds.

This makes China America's biggest creditor by far. In the nine months to September last year, it is estimated to have loaned US$475 billion to America. Will it keep doing so, especially after the new US Treasury Secretary Timothy Geithner said last month that China was manipulating its currency to boost exports?

China angrily denied the charge, accusing Mr Geithner of fanning protectionist sentiment in the US. On a visit to London early this month, China;s Premier Wen Jiabao told The Financial Times that it was "confusing right and wrong when people who have been overspending blame those who lent them the money".

Asked whether China would continue buying US Treasuries or use its reserves to stimulate its own economy, Mr Wen replied that the reserves "reflect the economic strength of a country"/

He added: "We are now having discussions about how to make rational and effective use of the Chinese foreign exchange reserves to serve the purpose of economic development in China."

Of course, having parked so much money in the US, China does not want to take any action that would undermine the value of its investments or the recovery of one of its main export markets. But Mr Wen seemed to be warning that US officials could be entering dangerous territory when he described continuing Chinese investment in Treasury bonds as a "a very sensitive issue".

In April, the Treasury is due to issue the latest of its six-monthly reports on the currency policy of US trading partners. The Obama administration will have to determine whether to charge China with currency manipulation and trigger possible sanctions, something the Bush adminstration chose not to do. It will be a critically important decision, one that will test US-China ties.

By Michael Richarson

For the Straits Times, Monday February 9 2009

lotus999 SG

yes, i think we are going to see a change in the world power. it probably would make up of several countries like the e.u., china and japan.

Only-Way-4-Destiny! SG

I think that China will most likely be the next candidate. Followed by India perhaps? These 2 countries are growing amid the global recession

reyes SG

i just wana bring some flashback to the 1920s, 30s and 40s.

The last time USA wall streets collapse, USA and the rest of the world go into a deep depression in the late 1920s, 30s. protectionism spread and every country on its own. Japan invade china and SEA. hitler rise to power and conquer EU. it was not until Japan attack pearl harbour that finally push americans into joinging this war.

Did the USA come out stronger and weaker after the war?

As long as USA remain the military powerhouse it is now, pure economic strength of china will never be able to stand out as big bros of the world.We have to remember this, CHina is not as big a consumer market as USA, it will be extremely hard to change this culture among chinese to be spending.

just a conspiracy theory of my own, the USA just need another massive war, the debt problems of itself, could possible be clean up, spanky clean.

angel7030 SG

I think that China will most likely be the next candidate. Followed by India perhaps? These 2 countries are growing amid the global recession

Ya, you are right, the PRC gals at Chinatown, Geyland and my place Joo Chiat are flourishing like good times even tho our jobless, loses and retrenchment hv increased. So too are the Indian gals at Serangoon and tekka. Take home pay per month average $10,000 sing dollars

angel7030 SG

i just wana bring some flashback to the 1920s, 30s and 40s.

Did the USA come out stronger and weaker after the war?

just a conspiracy theory of my own, the USA just need another massive war, the debt problems of itself, could possible be clean up, spanky clean.

So, my dear Fuhrer, do you intend to rise the Nazi again. I can make a film entitle "Mummy 4, rise of the Hilter" out of it.

In term of capitalist economy which the world followed, it is very unlikely for asian countries to shift the paradigm of economy powerhouse into their domain. The system of Capitalism was set and invented by the west, it is actually mend for their culture, we, asian seeing the gain of their achievement, adopted the system, however the flaws of capitalism is begining to show in a self destruction condition.

Asian may be conservatives in their spending, but we are good in saving, and our population is much more than the west, the only lacking in Asian are entrepreneurs and inventors/creators. Most of us are train to produce rather than to invent. Even the Japanese are good only in copying and improve on it. I believe that once asian are able to self sustain themselves in invention + production, the world of the west will be history. Therefore the first step we should take, is to remove the conservatives mode...learn to be flexible and be able to take risk,

Stevenson101 SG

So, my dear Fuhrer, do you intend to rise the Nazi again. I can make a film entitle "Mummy 4, rise of the Hilter" out of it.

Wow, i'm surprised. This is quite an interesting opinion, thank you for posting it.

Only-Way-4-Destiny! SG

nice comment

reyes SG

the americans + Japanese are good in invention + production. they also have a big domestic market to support its products.

If Asian dont have a big consumption culture , even with the smartest entrepuners we will never make asian the dominate economy of the world. basicall it is still back to square one, we depends on west for our products.

isnt taking risk brought us to where we are now? isnt derivative trading not risky? Risk has brought billions into wallstreet investment bank, it just take one mistake, it wipe out everything it has accumulated in the past 20-30years.. lehman..maybe over 100years of good work erase.

tai gok nang SG

I think it is already good that Asians are good at savings. We should think twice about encouraging consumption modeled on the west.

Adam Smith and Keynes's theories should not always be viewed as the magic way out.