COLUMN: Debt as a weapon

For most people, it would mean economic ruin.

The United States may one day find itself in a similar situation according to intelligence analysts.

Our nation is now over $13 trillion in debt. A significant portion of that debt – just under $4 trillion – is held by foreign investors.

What happens if a foreign investor with large U.S. Treasury holdings decides to use that debt as a weapon?

China and Japan account for approximately half of all foreign held U.S. debt. China, the top debt holder, has at least $900 billion in U.S. Treasury bond holdings. Some economists believe China may hold closer to $1 trillion if debt acquired through intermediaries is included.

If China were to suddenly dump this debt on the market, the repercussions for United States could be devastating. If the Chinese were to liquidate their U.S. debt holdings, it would destabilize our economy, have a potentially catastrophic effect on global financial markets and would impact the cost of borrowing for everyone.

While it is true that such a move would also hurt the Chinese economically, analysts believe it would hurt us more.

Besides, China does not actually have to dump their debt holdings to achieve its goals. Just the threat alone could be enough to allow the Chinese government to influence U.S. policy.

At the recent G20 summit, Obama very publicly called for the Chinese to adjust their currency to accurately reflect its value.

Congress is considering legislation to penalize China if they fail to do so on the grounds that the undervalued currency gives Chinese exporters an unfair advantage in the global markets.

Though China has agreed to be “more flexible” in its currency management, what happens if they renege? Do U.S. threats to impose trade tariffs carry any real weight?

More importantly, if Congress were to pass some sort of legislation detrimental to China, what happens if China retaliates by dumping Treasuries?

That is just one of the scenarios analysts were recently asked to consider. Unfortunately, no one really knows exactly what would happen if China declared economic war on the United States.

Even without the threat of such an economic apocalypse hanging over our heads, one needs to look no further than the recent G20 summit to see what poor standing the United States’ holds in terms of perceived global economic strength.

We have a serious credibility problem when it comes to managing national finances. When the President of the United States makes a pitch for one course and the rest of the G20 basically ignores him, that is proof that the world lacks faith in our government.

That lack of faith is completely justified. After all, the United States has been on a massive spending spree with no real plan to pay the tab. We have allowed the Chinese to acquire massive amounts of U.S. debt to finance our binge spending and sooner or later we are going to have to pay the piper.

At the G20, five of the six private talks Obama held were with Asian leaders including the heads of China and Japan, our two top debt holders.

A senior administration official described the talks as “an eloquent demonstration of the importance that the President attaches to Asia, the importance of Asia to our political security and economic interest."

Indeed.

We do not need “eloquent demonstrations” when it comes to political security and economic interests. We need action. It is simply too dangerous to remain in a position in which any one nation holds such a significant portion of our debt. The United States must reduce spending and quit creating government programs we do not have the financial means to support if we are to avoid economic ruin.

Kristi Reed is a reporter for the Barrow Journal. She can be reached at kreed@barrowjournal.com.