By LCR Contributor Barrell Rider
There is a clear pattern that has developed over the past decade and it continues to trend in the same direction, in fact, in recent years it has even escalated. What is it we are speaking of?
Foreign ownership of US Sovereign debt.
China has emerged as the number one foreign investor of U.S. debt ahead of both Japan and United Kingdom. Other major holders of US debt includes the OPEC countries.
Now foreign investment in US is not all bad, after all, with today's rates the U.S. is financing its spending at extremely low rates and with the global stock crash of 2009, world confidence in the United States was evident.
I'm no expert but with the massive amount of debt the U.S. has and with the likelihood of rising rates, this debt will get more and more expensive. U.S. deficits and foreign ownership of U.S. debt seem to grow together. And it now appears that some foreign governments are using their credit for leverage in US fiscal policy.
In addition to holding nearly a trillion in US treasuries, the Chinese also have significant investment in Fannie May and Freddie Mac, as well as many other financial institutions, and according to Wiki Leaks documents, the Chinese voiced their concern and requested specific policy action and favors from the US treasury department in a series of meetings between 2008 and 2010.
This illustrates how massive foreign ownership of US debt can compromise US leverage and autonomy. There is no doubt that the US and Chinese economy are co-dependent on each other. But how beneficial is it to the US to rely so heavily on Chinese manufacturing? It seems the trend now is that R & D is done in the United States and then the products are manufactured in China. Many products we enjoy are made in China. Some products may surprise you such as iPods, Black and Decker power tools and many children's toys. During the rise of Chinese manufacturing there has also been another seemingly linked result.
We now live in a throw-away society. Many of the things that were once built to last a decade or two, now are thrown away and replaced every few years. This brings out a whole new debate on cost of a product vs. cost of ownership. Remember those old Curtis Mathis T.V.'s? The original line was made and the USA, boasted the longest warranty of any T.V. and you couldn't kill the T.V.'s they lasted 20 or more years. Later in the companies history they outsourced much of the manufacturing and became a cheaper brand which eventually died out. In 2000, China's share of U.S. debt was around 6 percent, today it has grown to about 22 percent.
This situation, in my opinion, has been brought on by reckless spending and fiscal policy of the United States. It seems the U.S. must control spending and begin cutting debt. The cycle that the government is in now seems to be getting worse. In 2010, Social Security paid out more than it took in. Our government's response? Lower social security taxes by a third. Medicare too, is in big trouble as we learn more and more by each study that is done. The more the government kicks the can down the road, the more foreign debt the United States will continue to take on.
It seems we are relying on foreigners to fund our entitlement programs. This will have a day of reckoning in which our children will be burdened with the shortfall. I shudder as I think about the transfer of wealth on a global scale that will happen in a couple of decades when our children must make up the gap. In recent years foreign ownership of U.S. debt has hovered around 50 percent. It is my view that the U.S. must address this problem now and reform Social Security and Medicare, this should have been done before any talk of government health care or health care reform was even brought to the table.
The United States has so many built-in advantages over countries in the Middle East or China that it makes our current situation all the more troubling. As unrest boils over in North Africa and the Middle East, we are reminded of how precious our freedom and independence is. We too, have an obligation to future generations to bestow upon them the opportunity and strength that previous generations have provided all of us. The level of prosperity and freedom in the United States is no coincidence. The two have propelled each other. A look at history shows the failure of totalitarian, socialist and communist societies time and time again. Its time the United States government prioritizes its budget policies and begins to reduce its dependency on other nations to conduct its daily business.