Top of the News: If the market ends a good week on a wobbly note it will be largely because of one of those pesky warning calls more and more Americans are getting from the creditors. In this case, it was from the nation’s biggest creditor, China. Chinese Premier Win Jiobao told a press conference he was “definitely a little worried” about his government’s $1 trillion investment in U.S. Treasuries. He wants the Obama administration to work to ensure that the investment doesn’t lose value in an inflationary spiral.
The great American spending spree — accompanied by deindustrialization — came at a price. We owe trillions to the world, including approximately $2 trillion overall to China. It was part of the two countries unsustainable relationship that could be reduced to “stuff in exchange for debt.” In Keynesian theory, governments run deficits in bad times to revive the economy, then repay them in good times. Unfortunately, we ran up government, corporate and personal debt in good times — to historic levels. Now that the government needs to spend to stimulate the economy, our creditors are saying, “watch that limit on your credit card.” The Navy hosed down the Chinese sailors in that incident earlier this week. Now we’re getting hosed back.
This warning is sure to revive the financial sum-of-all fears: That the time would come when foreign investors exited American debt and dollar assets en masse, dropping us into a real depression. That probably won’t happen. First, the dollar and Treasuries are a safe haven in bad times, still. Second, China needs us as much we need it. But the warning shows the fragility of the situation, and the limits that fiscal and monetary policy face in this recession. As the saying goes, “Be nice to your Chinese banker.”
The Back Story: The trade deficit fell to its lowest level in six years — that’s good news, right? Not necessarily. For one thing, like falling oil prices, its a sign of a collapsing global economy. But for a trade dependent state such as Washington, the trade numbers have added meaning — less trade hurts Washington jobs. In this Sunday’s Seattle Times, my column will discuss the state’s trade economy and the rumblings of protectionism around the world. I hope you’ll check it out in the business section.
Today’s Econ Haiku:
Top credit rating went flat.
Can’t call triple A