CHINA THREATENS US SPENDING- CALLS FOR NEW GLOBAL RESERVE CURRENCY

The US has lost its long coveted AAA credit rating by S&P’s as of Friday and an editorial by China’s state run media, Xinhua, has given light to their viewpoint.

The editorial issued the following candid, and threatening statements:

“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,”

“The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered,”

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.”





China owns $1.160 trillion worth of US Treasuries as of May, the largest holder behind the Federal Reserve. A Chinese credit rating agency, Dagong Global Credit Rating Co., was the first to downgrade US debt back in November 2010. The agency blamed the Federal Reserve’s loose monetary policies as an insufficient means of satisfying creditors, since inflation destroys the real value of a creditor’s assets. Dagong downgraded the US again after the debt ceiling was raised, moving government’s debt to ‘A’ from ‘A+’.

Dagong has blamed US debt growth which is outpacing economic growth, as a major factor in doubting the credibility in debt repayment. The US currently has negative marginal utility to their debt, meaning for every dollar they borrow, they return less than a dollar in income:

The US has not acquired much asset value for this debt either, having consumed much of their spending which was financed by debt. Whether or not the views from China’s state media, which generally reflect the opinions of leaders of the Communist Party, are going to affect China’s willingness to hold on to US debt remains to be seen. Should US Treasury’s gain a stigma in the market place, gold will likely competitively absorb a lot of the financial fall out, leading to higher prices for the precious metal.

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