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The People's Daily, People's Republic of China

U.S. Game of Chicken Threatens Creditors and Global Economy


Does the U.S. political crisis demonstrate what Beijing has been saying for years: that it is dangerous for U.S. creditors to allow the dollar to continue as the global currency of choice? According to this article by Li Xiangyang for the state-run People's Daily, until the dollar is dethroned, holders of U.S. sovereign debt 'must either endure the enormous immediate financial risk brought about by a U.S. default, or hold additional U.S. debt at their peril.


By Li Xiangyang*


July 8, 2011


People's Republic of China - The People's Daily - Original Article (English)

President Barack Obama: Body language experts would have no trouble detecting that this man is under stress.


BBC NEWS VIDEO: What would a U.S. economic downgrade really mean?, July 14, 00:01:42RealVideo

The dispute between the Obama Administration and the U.S. House of Representatives about whether to raise America's $14.3-trillion debt ceiling is becoming ever-more intense. If the two sides fail to reach a consensus by August 2, U.S. Treasury bonds will at the very least face the risk of a "technical default."


Both sides are trying to use this risk to coerce the other side into submission. This not only reflects real differences between U.S. political institutions and political parties, but threatens to have a major impact on the global financial system.


As the issuer of the global reserve currency, the United States has involved the interests of global creditors in its domestic political struggle. Even if the two sides reach consensus before the deadline, the U.S. has set a bad precedent by ignoring the global economy and the interests of international creditors.


In fact, as early as May 16, America's total national debt reached the debt ceiling, setting a 60-year high. This is the result of the long-running debt-driven consumption policy adopted by the U.S.


In line with past practice, the White House should be able to obtain Congressional authorization for raising the debt ceiling. After all, Congress has raised the debt ceiling 16 times since 1993. But this time, in response White House please to raise the debt ceiling before upcoming general elections, the Republican Party, through the House of Representatives, is demanding new obligations requiring cuts in federal spending of $2 trillion over the next 10 years - and without tax increases.


For the Obama Administration to accept such conditions could result in Obama losing his bid for reelection in 2012. On the other side, at least theoretically, if Congress fails to raise the debt limit by August 2, the government will be unable to pay interest due on its debt (the next interest payments to creditors are due on August 15).



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As a result, the Obama Administration would have to suspend pension checks to retirees and cease interest payments to foreign creditors. Such an event would likely have catastrophic consequences that neither the United States nor the global financial market can bear. Nevertheless, the White House and Congress continue to use this likely catastrophic outcome as a way of forcing the other side to submit.


Although clear warnings have been issued by the world's credit rating institutions about the increased risk of default posed by U.S. national debt and the trade volumes of credit default swaps, chances that the United States will face a sovereign debt crisis like Greece has are very slim.


First, the latest statistical data show that investors remain interested in purchasing newly-issued U.S. debt. Second, a “technical default” won't prompt central banks in other nations, which are the primary holders of U.S. national debt, to dump it.


Foreign holders of U.S. debt confront a serious risk. Because U.S. political parties only consider their own interests and dare to ignore those of foreign creditors, it is very likely that sooner or later, America will harm the interests of foreign creditors for its own political, economic or security interests.   



In other words, the U.S. may use the possibility of a debt default to threaten other countries. This is the horrific systematic risk hidden within the current international financial system. The U.S. debt crisis poses a real dilemma for foreign creditors. They must either endure the enormous immediate financial risk brought about by a U.S. debt default, or hold additional U.S. debt at their peril.


At the same time, the U.S. debt crisis serves as a wake-up call to China, the largest foreign holder of U.S. Treasury bonds. China must stop increasing its already massive holdings of foreign exchange reserves and be alert to the national security and national financial risks inherent in excessive U.S. dollar assets.


There is a growing consensus in this post-global financial crisis era that the dollar-centered system of international currency exchange should be reformed as quickly as possible. Getting rid of the dollar will serve not only the interests of creditor countries, but ensure the stability and sustainability of the international financial system.


*Li Xiangyang is director of the Institute of Asia-Pacific Studies under the Chinese Academy of Social Sciences.


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[Posted by WORLDMEETS.US July 17, 12:49pm]


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