China Seeks Guarantees on US Treasuries. US to Offer Alaska

Friday, March 13, 2009 1:48

With all the doom and gloom that has become the current economic cycle, and the fact that the current cycle largely comes as a result of poor debt management, I have always worried a bit about the long term attractiveness of US Debt as an investment vehicle.

Yes, I will agree that US treasuries have historically been seen as risk free, or as offering the least amount of risk, but it has been clear to me for a long time that China was not all that comfortable taking up as much as they have been.

That they would have preferred other instruments to bring a bit of balance to their portfolio

In fact, it wasn’t more than a few weeks ago that Luo Ping was quoted as saying that they hated their position.

“We hate you guys. Once you start issuing $1 trillion-$2 trillion…we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.

today, that was taken to a higher level when premier Wen Jia Bao offered a bit of color to what otherwise was a standard NPCC:

“Of course we are concerned about the security of our assets and, to speak truthfully, I do have some worries,” Wen said.

“I would like, through you, to once again request America to maintain their trustworthiness, keep their promise and guarantee the safety of Chinese assets.”

A big statement. HUGE in fact

Seeing this coming early on, I once quipped that the US should just offer Alaska as collateral to keep the Chinese investing.  It has oil, it has clean water in the form of icebergs, it has fish, and it can “almost be seen” from China’s northern border anyway. (I WAS KIDDING… DON’T SEND ME HATE MAIL)

It is clear that the US needs the money (Obama’s plan requires funding), and that the only alternatives were either printing money (Carter era inflation) or keep their Chinese buyer’s happy… or at least reduce the risk of default (Mexican Style).

So, the question now. the real question. Is what does the US need to do at a policy and fiscal level to maintain their credit trust worthiness, and what will be the cost of capital going forward? What should happen were China to finally act in a much larger measure to diversify their risk?

Obviously China cannot do anything drastic as that would cause the dollar to the wrong way, but like any boxer in the corner taking body blows, China is going to look for a way to get out and may need to throw a punch or two to do so.

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3 Responses to “China Seeks Guarantees on US Treasuries. US to Offer Alaska”

  1. gregorylent says:

    March 13th, 2009 at 4:17 am

    china, spend the bucks while they still have value, on commodities and infrastructure …..

    the us can do nothing, and all concerned know it

  2. Bill says:

    March 13th, 2009 at 8:48 am

    Sounds like Wen has no idea how the international money market works. But that’s understandable. RMB has never been traded freely in the global market.

  3. mjB says:

    March 20th, 2009 at 9:45 pm

    Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.