Myth about U.S. National Debt and China (Summary)

[We had some scattered analysis about U.S. Debt bought and held by China. This is a quick summary. A printable 4-page copy is available here. For detailed numbers see our previous blogs.]

Myth: China bought and held on too much U.S. Debt

Former Sen. Alan Simpson, co-chairman of the president's deficit-reduction committee's numbers "There's a group out there that doesn't give a damn about Republicans or Democrats or the president, and it's the people we owe $16 trillion to. Half of that is owned by private people -- people in New York or Cody, Wyoming. The other half is owned by feds, and half of that is owned by China." To cut the chase short, his numbers are “Private US Citizen --50%, Federal Reserve Bank 25%, China --25%".

Fact:

As the largest trade partners of United States, China held a healthy but modest portion of U.S. National Debt to finance the international trade. Even at the peak in 2011, China held only 8.3% of US debt. In 2012 Japan again became the largest foreign U.S. Debt holder. It is normal and not an issue even to talk about for people who cannot distinguish fiscal deficit (big problem) and trade deficit (largely normal in international finance).

It is even more informative if we look at foreign entities' holdings relative to their size of GDP (the zeros should be N/A)

Mainland China’s holding of U.S. Debt is modest to its GDP, given the fact China and U.S. had the biggest trading partnership. It is comparable to Brazil.

Per capita, Chinese’s ownership (mainland) of U.S. Debt is at rock bottom, even below Russia. It is 27% (almost 1/3) below Brazil and way lower than anyone else.

So if shaking down or killing is a solution, going after the banking centers or anywhere else is much more effective than worry about hunting down the Chinese in a vast country.

Myth: China’s holding of U.S. Debt can be a national security threat

Building up from their imaginary numbers, former congressman and another 2012 President wannabe  Allen West declare "China owns about 29 percent of (the U.S.) debt.'' and "our Navy must be supported, not forgotten about". 2012 President aspirant Michele Bachmann claimed "Hu's your daddy" with US national debt.Congressman Sam Johnson "We must not let any other countries hold our national and economic interests hostage." Herman Cain, another Republican presidential candidate in 2012, "If we don't begin to grow with the potential that we have in this country, we will have another national security crisis, and that national security crisis is that China will be as big as we are," Cain said. "They'll start to develop a military as big and as good as ours, and they've got a billion more people and they're holding 26 percent of our debt. And you think we're going to be able to sing Kumbaya with them?"

Lastly pastor Mike Hoggard of Bethel Church in Festus, Missouri, made the sensation speech that China own so much U.S. Debt that it will force U.S. to repay, ending up U.S. will be so miserable that “"And thou shalt eat the fruit of thine own body, the flesh of thy sons and of thy daughters, …. " Deuteronomy 28:53

Fact:

Firstly China’s U.S. debt ownership is modest and healthy. In GDP and per capita term it is much lower than comparable countries.

Secondly as long as a country is willing to keep on printing its own paper money there’s no danger of real default. Surely the paper will worth less if more outstanding paper money were used to convert to goods. That will hurt the purchasing power of anyone holding the currency.

Thirdly unlike Mortgage, national debt in its own domestic currency is just a promise with no collateral to be foreclosed on.  Even if U.S. chose to default, no country can force U.S. to pay a penny. All they can do is try to go through their, US or international legal systems to negotiate their rights. They surely have the choice of not purchasing any U.S. debt in the future, thus put a stop on the trading and financing. It can be devastating for everyone but debt holders are at disadvantage since they've already gave goods or service of valuable to U.S. in exchange to the IOU which may not worth anything. Even countries defaulted national debt denominated in foreign currencies (which can be a bigger problem since that cannot be printed away) still survived without anyone sending an army of debt collectors. Readers are encouraged to research further into that topic.

Lastly, U.S.’s military is still and will be in foreseeable future the strongest. The alliance it has ensures U.S. will have upper hand in any military conflicts. There’s no evidence suggesting China will be on the trajectory of aggression or prevail in a war. China has its own issue with economy, aging and pollution.

Dumping U.S. Debt will do much bigger harm to China economy without hurting U.S. much, as a result, Defense Secretary Leon Panetta called China’s ownership of U.S. debt non-problematic and non-threatening. In fact, China’s purchase and holding of U.S. debt allowed Federal Reserve to pump money into economy to avert even worse recessions.

Myth: China manipulated of Currency and Caused U.S.’s Debt Problem

Fact:

We already see that China’s holding of U.S. National Debt is modest. The realities are that China didn't set out to destroy U.S. industries. The two countries built upon their own strength and specialized in difference industries and roles in world finance. Like two companies, they cooperate and compete. Due to fast rise of labor cost and protectionism, a lot of shoes, clothes and other manufacturers are also closing in China. They are replaced by manufacturers in other countries.

Not everyone agrees on the benefit of free trade, but there’s no evidence that China engaged in or has the capability of accomplishing outrageous currency manipulation to the detriment of U.S. The debt number simply told us that.

The root cause of U.S. Debt problem is the fiscal deficit. The biggest contributors are:

• Social Security
• Medicare
• Other Domestic Entitlement
• Military and Intelligence Spending
• Holes in tax system

When Social Security System was established in 1935 to combat the worst economic crisis, the average life expectancy was 61 years old in United States. With benefit fully starts at age of 65, a large portion of the population contributed but died before claiming benefit. This allowed the rest to enjoy the pie. In 2011 the average life expectancy was 78.7 years in United States. A lot of people get into Social Security pool and stay on it much longer (on average 18 years longer for a hundred million people). As a result the old Social Security promise will collapse under the weight.

The aged and more population also need much more in Medicare and other domestic entitlement programs, making them unattainable. In addition, these are costing much more than before.

U.S. Department of Defense is the world’s biggest employer. This doesn't even account for other intelligence agencies or more expensive private contractors like Mr. Snowden. The wars and drone operations, intelligence operations and high tech weapon programs are also costly.

U.S. tax code allowed a lot of large corporations to pay little or zero tax. Non-for-profit and small business owner also pay little tax. A lot of person at the bottom cannot afford to pay any tax. They get support from tax dollar instead. The top also doesn't pay as much tax as mid-class relative to their real income or asset. Capital gain tax, dividend tax and Estate tax ere cut in the irrational years of dot.com bubble. No one wants to pay tax, but any government and public projects need money.

U.S. and world economy are facing these challenges. Stop using xenophobia and racial hatred to deflect these issues like Nazis resorted to justify WWII. Yes, a world war can provide the political cover to kill and deny the rights to live for everyone demand it.

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