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View Full Version : China warns US debt-default idea is ‘playing with fire’



shepherdsword
Jun 9th 2011, 01:39 PM
SINGAPORE — US Republican lawmakers are "playing with fire" by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China's central bank said on Wednesday.

The idea of a technical default — essentially delaying interest payments for a few days — has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending, Reuters reported on Tuesday.

But any form of default could destabilize the global economy and sour already tense relations with big US creditors such as China, government officials and investors warn.

Li Daokui, an adviser to the People's Bank of China, said a default could undermine the US dollar, and Beijing needed to dissuade Washington from pursuing this course of action.

"I think there is a risk that the US debt default may happen," Li told reporters on the sidelines of a forum in Beijing. "The result will be very serious and I really hope that they would stop playing with fire."

China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, US data shows, so its concerns carry considerable weight in Washington.

"I really worry about the risks of a US debt default, which I think may lead to a decline in the dollar's value," Li said.

The US Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year. The US Treasury Department has said it will run out of borrowing room by Aug. 2.

If the United States cannot make interest payments on its debt, the Obama administration has warned of "catastrophic" consequences that could push the still-fragile economy back into recession.

"It has dire implications for the economy at a time when the macro data is softening," said Ben Westmore, a commodities economist at National Australia Bank.

"It's just a horrible idea," he said.

Financial markets are following the US debate but see little risk of a default.

US Treasury prices were firm in Europe on Wednesday, supported by a flight to their perceived safety on the back of the Greek debt crisis (http://www.gmanews.tv/story/222889/business/china-warns-us-debt-default-idea-is-playing-with-fire#) and worries about a slowdown in US economic growth.

Marc Ostwald, a strategist with Monument Securities in London, said markets were working on the assumption that the US debt story "will go away". But nervousness would grow if a resolution was not reached in the next five to six weeks.

‘Wouldn’t happen’

The Republicans' theory is that bondholders would accept a brief delay in interest payments if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations (http://www.gmanews.tv/story/222889/business/china-warns-us-debt-default-idea-is-playing-with-fire#) later on.

But interviews with government officials and investors show they consider a default such a grim — and remote — possibility that it was nearly impossible to imagine.

"How can the US be allowed to default?" said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally."

Indian officials say they have little choice but to buy US Treasury debt because it is still among the world's safest and most liquid investments. It held $39.8 billion in US Treasuries as of March, US data shows.

The officials declined to be identified because they are not authorized to speak to the media.

Oman is concerned about the impact of a default on the currency reserves of the sultanate and its Gulf neighbors.

"Our economies are substantially tied up with the US financial developments," said a senior central bank official, who spoke on condition of anonymity.

"It just wouldn't happen," said Barry Evans, who oversees $83 billion in fixed income assets at Manulife Asset Management. "They would pay their Treasury bills first instead of other bills. It's as simple as that."

Monument's Ostwald called the default scenario "frightening" and said bondholders' patience would wear thin if lawmakers persisted in pitching this strategy in the coming weeks.

"This isn't a debate, this is like a Mexican standoff and that is where the problem lies," he said.

Yuan Gangming, a researcher with the Chinese Academy of Social Sciences, a government think tank, smelled some political wrangling behind the US debt debate as the 2012 presidential election draws nearer and said Republicans "want to make things difficult for Obama."

But with time running short before the US Treasury exhausts its borrowing room, Yuan said default was a real risk.

"The possibility is quite high to see a default of the US debt (http://www.gmanews.tv/story/222889/business/china-warns-us-debt-default-idea-is-playing-with-fire#), which would harm many countries in the world, and China in particular," he said. — Reuters

slightlypuzzled
Jun 9th 2011, 01:46 PM
China now has a realty driven bubble crisis of their own. There are many, many new office buildings, houses, and shopping centers that are empty and several newly built towns that are just ghost towns. They were built on speculation that just cratered. I am wondering, in that crisis of theirs, how many American inverstors got caught up in that one....?

Reynolds357
Jun 9th 2011, 02:03 PM
Lets look at the big picture here. We run a huge trade deficit with China. They send in Cargo ships to our ports that are full and they leave nearly empty. Most of their ships have to take on ballast to even sit deep enough in the water to make the return trip. If China starts en economic war with us, who will lose? Them. Their market for their goods dissappears overnight. They plunge quickly into economic ruin. What happens to us? We have a temporary shortage of goods until we build plants to manufacture them again. We have an economic boom. What if they call in the debt we owe them? Nothing. The only security for that debt is the "faith and promise" of the U.S. govt. Our govt. lies all the time.
Really, what are they going to do? Invade Japan?

Hunter121
Jun 9th 2011, 03:32 PM
Lets look at the big picture here. We run a huge trade deficit with China. They send in Cargo ships to our ports that are full and they leave nearly empty. Most of their ships have to take on ballast to even sit deep enough in the water to make the return trip. If China starts en economic war with us, who will lose? Them. Their market for their goods dissappears overnight. They plunge quickly into economic ruin. What happens to us? We have a temporary shortage of goods until we build plants to manufacture them again. We have an economic boom. What if they call in the debt we owe them? Nothing. The only security for that debt is the "faith and promise" of the U.S. govt. Our govt. lies all the time.
Really, what are they going to do? Invade Japan?

Exactly, china is so dependent on us, if were go to war with them, they would lose overnight, because all their money comes from us.

Cornflake
Jun 9th 2011, 04:57 PM
What happens to us? We have a temporary shortage of goods until we build plants to manufacture them again. Oh, no big deal,Americans will surely put up with a "temporary" shortage of most consumer goods, including a lot of foodstuffs, electronics, clothing, toys, mechanics, etc., etc., etc., etc. until someone here decides to BUILD PLANTS and start to manufacture the things at double or triple the old cost. No big! Not even mentioning the massive real estate holdings the Chinese have in this country or what other countries we owe money to might do in solidarity.

I think we need them more than they need us.

Saved7
Jun 9th 2011, 05:29 PM
We are in a bit of a bind financially and I honestly don't see any way out, other than budget cuts...serious budget cuts and getting the dems to agree to such a thing seems next to impossible. But then again, I am not an economics professor with access to all of our country's economic information.

shepherdsword
Jun 9th 2011, 09:48 PM
Lets look at the big picture here. We run a huge trade deficit with China. They send in Cargo ships to our ports that are full and they leave nearly empty. Most of their ships have to take on ballast to even sit deep enough in the water to make the return trip. If China starts en economic war with us, who will lose? Them. Their market for their goods dissappears overnight. They plunge quickly into economic ruin. What happens to us? We have a temporary shortage of goods until we build plants to manufacture them again. We have an economic boom. What if they call in the debt we owe them? Nothing. The only security for that debt is the "faith and promise" of the U.S. govt. Our govt. lies all the time.
Really, what are they going to do? Invade Japan?

What about the ethics involved? Is it right to default on a debt that has been promised to be paid? Even if the agenda is to rebuild our manufacturing infrastructure? What about our credibility? What about the domino effect on the smaller nations? If a default by Greece can cause the economic havoc that it did,what would a default by the US cause? I think the whole suggestion is tied to the agenda by the international bankers to usher in a one world currency.
Call me a kook but the conspiracies that seemed so paranoid 20 years ago are making headlines today.
Three words...New World Order.

bdh
Jun 13th 2011, 06:53 AM
If a default by Greece can cause the economic havoc that it did,what would a default by the US cause?

I don't even want to think about that. A few words do come to mind: 'huge', 'terrible', 'famine', 'economic collapse'.


I think the whole suggestion is tied to the agenda by the international bankers to usher in a one world currency.

I agree. The US$ is a thorn in the side of "progress" for the international bankers being the reserve currency and all. The day we see it dislodged as the reserve currency is they day the real trouble begins.


Call me a kook but the conspiracies that seemed so paranoid 20 years ago are making headlines today.
Three words...New World Order.

I remember reading a book in 1984 about this. The author speaks of things like -

- a cashless society where everything is done electronically
- banks actually don't have cash in their vaults, it's just numbers stored on a hard drive
- big brother watching you with cameras at every street corner, every airport etc
- thumbprint and retina recognition at banks, airports, border crossings etc
- Satellites being able to track you anywhere on the planet
- massive computer systems capable of scanning millions of images to pull facial recognition of traffic cams or any other source
- had the author know about the internet I'm sure something would have been said about that too
- the list was a lot longer ...

At the time, I spoke with some friends and told them about this book and the general comment was "What have you been smoking dude? This is crazy talk! Never going to happen!"

Sadly, most of this has happened!

RR van Wyk
Jun 13th 2011, 08:32 AM
Oh, no big deal,Americans will surely put up with a "temporary" shortage of most consumer goods, including a lot of foodstuffs, electronics, clothing, toys, mechanics, etc., etc., etc., etc. until someone here decides to BUILD PLANTS and start to manufacture the things at double or triple the old cost. No big! Not even mentioning the massive real estate holdings the Chinese have in this country or what other countries we owe money to might do in solidarity.

I think we need them more than they need us.

Good post. There is no easy answers here... America needs the rest of the world just as badly as the world depend on America. America isn't by far an unsinkable ship and it is funny to hear people say the ship will never sink while it already started to sink....