Sunday, March 8, 2009

Following the Money (1)

In the movie, All the President's Men, when Bob Woodward was trying to comprehend the incomprehensible in governmental activities, Deep Throat appeared in the shadows and advised him to "Follow the money." Indeed. In my experience, no matter how irrational a governmental activity seems on its face, as I examine it through the lens of financial transactions, the decisions involved do begin to make sense.

As Americans watch our assets turn into liabilities by the billion day after day, it's seems an especially good time to attempt to follow the money. Lacking a key to even one financial boardroom, I'll have to start my attempt to figure out what is going on with the broadest possible strokes.

Our biggest creditor, as just about everybody knows, is China. The U.S. and China have been swapping wealth for a long time, with the U.S. getting low-priced goods produced at low labor (and other) costs, and China getting U.S. dollars. Lots and lots of them. China has the largest hoard of other countries' currencies on the planet, about $2 trillion worth. (By comparison, the U.S. has stashed away about $70 billion in foreign exchange.)

The Chinese government and Chinese companies have been in the habit of loaning money directly to the U.S. treasury, but for the last number of months, China has been cutting back on these loans.

Interestingly, in the first half of 2008, China loaned $46 billion to Fannie Mae and Freddie Mac through bond purchases, but then sold off more than half of those bonds before November, a worrisome fact that reportedly contributed to the U.S. Federal Reserve's decision to bail out financial institutions to the tune of $700 billion.

Then, in late January, at the Davos World Economic Forum 2009 held in Switzerland, Wen Jiabao, Premier of the People's Republic, came right out and blamed the world economic crisis on the United States, with our "prolonged low savings and high consumption," "financial institutions in a blind pursuit of profit," failure to supervise and regulate financial innovations, etc. (An article published in the Wall Street Journal following Wen's speech provides a basic view of the current financial relationship between China and the U.S.)

A month later, Hillary Clinton, on her way to Beijing in her role as U.S. Secretary of State, said that "pressing" the Chinese on human rights issues couldn't be allowed to "interfere" with discussions on "the global economic crisis, the global climate change crisis and the security crisis." That certainly was more an attempt to gain Brownie points from Chinese leaders than to align the Obama administration with the respect for human liberty underlying the very existence of these United States.

Of course, China is not our only creditor or our only critic. But it seems logical to examine our asset drain to China as we try to understand how we got into this financial mess and how we can get out again.

1 comment:

  1. This is something I'm not hearing tons about. It is definitely something to follow up on and analyze.