American Debt, Chinese Anxiety

Menzie Chinn:

American Debt, Chinese Anxiety, by Menzie Chinn, Commentary, NY Times: Last week, the United States once again walked up to the precipice of a debt default, and once again the world wonders why any country, much less the world’s largest economy, would endanger its financial reputation and thus its ability to borrow.

Though a potential global financial crisis was averted at the last minute, one notable development has been a string of warnings by Chinese officials. ...

These statements, unusually blunt coming from the Chinese, show that repeated, avoidable crises threaten the privileged position of the U.S. as issuer of the world’s main reserve currency and (until now) risk-free debt.

It is unlikely that China would provoke a sudden, international financial calamity — for instance, by unloading U.S. Treasury securities and other government debt. Nonetheless, the process of repeated crises and temporary reprieves will only solidify the Chinese government’s determination to diversify its holdings away from dollar-denominated assets. Moreover, these crises provide ammunition to advocates within the Chinese government for expanding the role of the renminbi in international markets. Both of these trends will erode the ability of the United States to issue debt at super-low interest rates, and accelerate the ascent of China’s currency. ...[more]...