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China should 'trust, but verify'
By David S. Markun |
August 20, 2009, Thursday
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RECENTLY there has been much discussion about the dilemma the Chinese government faces stemming from its large holdings and continued purchases of United States government debt.
The Chinese government is rightfully wary of American fiscal carelessness, and the possibility of holding on to assets that will be worthless over time given the very real prospect of a declining dollar.
China could achieve asset protection by informing the US that it will continue to buy US debt but only if denominated in yuan. Alternatively, China could insist on purchasing bonds that give it the right of redemption in either dollars or gold.
If the US government is able to miraculously hold off monetization over the next several decades, as Federal Reserve chairman Ben Bernanke and Secretary of the Treasury Timothy Geithner claim it can do, China would receive the benefit of its bargain when it purchased the bonds.
If the US government is stuck in a fiscal vortex requiring a monetization of the federal debt, and there is a consequent decline in the value of the dollar, the Chinese government could demand payment (for new purchases) in gold which generally moves in the opposite direction of the dollar or in yuan.
This solution is fair, and serves the long-term interests of both countries.
By forcing the US to borrow funds denominated in yuan (or perhaps a basket of currencies) or redeemable in gold bullion, China would in effect be doing something that no US Congress and no American president has been able to do: Force America to live within it means.
Though this would cause short-term pain for the American populace, it would start the inevitable process of forcing the country to come to grips with reality thereby rescuing future generations who will otherwise be saddled with unimaginable levels of debt.
It would also ensure that the Chinese people who worked so hard to produce the goods that have been sold to America, and who lent, and continue to lend, vast sums of money to the US, are repaid with an asset that will maintain some value over the next few decades.
When former US President Ronald Reagan negotiated arms control agreements with the former Soviet Union, he would repeatedly reference the Russian saying: "doveryai, no proveryai" which means "trust, but verify."
The Chinese government should do the same: continue buying US debt but only if the US verifies its verbal assurances.
If China continues to feed America's profligate ways without requiring some kind of safety net, it will only have itself to blame, when down the road, America defaults on its debt either directly or through the process of monetization.
(The author is managing partner of the law firm Markun Zusman & Compton LLP. Shanghai Daily condensed his article.)
The Chinese government is rightfully wary of American fiscal carelessness, and the possibility of holding on to assets that will be worthless over time given the very real prospect of a declining dollar.
China could achieve asset protection by informing the US that it will continue to buy US debt but only if denominated in yuan. Alternatively, China could insist on purchasing bonds that give it the right of redemption in either dollars or gold.
If the US government is able to miraculously hold off monetization over the next several decades, as Federal Reserve chairman Ben Bernanke and Secretary of the Treasury Timothy Geithner claim it can do, China would receive the benefit of its bargain when it purchased the bonds.
If the US government is stuck in a fiscal vortex requiring a monetization of the federal debt, and there is a consequent decline in the value of the dollar, the Chinese government could demand payment (for new purchases) in gold which generally moves in the opposite direction of the dollar or in yuan.
This solution is fair, and serves the long-term interests of both countries.
By forcing the US to borrow funds denominated in yuan (or perhaps a basket of currencies) or redeemable in gold bullion, China would in effect be doing something that no US Congress and no American president has been able to do: Force America to live within it means.
Though this would cause short-term pain for the American populace, it would start the inevitable process of forcing the country to come to grips with reality thereby rescuing future generations who will otherwise be saddled with unimaginable levels of debt.
It would also ensure that the Chinese people who worked so hard to produce the goods that have been sold to America, and who lent, and continue to lend, vast sums of money to the US, are repaid with an asset that will maintain some value over the next few decades.
When former US President Ronald Reagan negotiated arms control agreements with the former Soviet Union, he would repeatedly reference the Russian saying: "doveryai, no proveryai" which means "trust, but verify."
The Chinese government should do the same: continue buying US debt but only if the US verifies its verbal assurances.
If China continues to feed America's profligate ways without requiring some kind of safety net, it will only have itself to blame, when down the road, America defaults on its debt either directly or through the process of monetization.
(The author is managing partner of the law firm Markun Zusman & Compton LLP. Shanghai Daily condensed his article.)
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