The Chinese are Our Friends

Chinese Premier Wen sounded like the sleepless banker worrying out loud this week about whether or not the US will repay the $700 billion that China has invested in US treasury securities. Bloomberg reported that Wen asked for assurances US debt is safe.

“We have lent a huge amount of money to the United States,” Wen was reported saying. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

What are the Chinese worried about? INFLATION!

The dilemma for the Chinese is that while there is uncertainty about the current policy of the US and little experience upon which to build confidence in Obama’s Administration, the alternatives to diversify away from Treasuries are more risky. Sure, China could invest in commodities, but as many who loaded up on silver, gold or oil can tell you what goes up fast can crash like a lead balloon.

The Chinese are our Friends! The Chinese are our Friends!

China is worried, in part, because Congress is spending money by the trillions and Team Obama, apparently not knowing what else to do, is going along. Meanwhile, left to its own devices, the market will likely heal itself. It certainly is searching for a reason to rally—just look at the stock market results from last week after CitiGroup said it was profitable for January and February. Even bad news—GE credit rating was cut a notch—is good news—it could have been worse!

In the early part of this financial panic, the world pointed fingers at the US saying “ you screwed up big time,” then one by one they discovered their own banks, insurance companies and other financial geniuses drank the same toxic Kool-Aid of flipping bad loans and rebundling them into something sold as “securitized” good loans over and over.

We are now engaged in the age old process of defining the “Biggest Loser” and each week a few more players are eliminated. So far the Government ( both Bush and Obama) have a real policy of throwing money at the problem to (a) buy time (the Bush policy) and (b) fund the Democrat agenda (“never waste a good crisis”) since most of this stuff we are throwing money at would never fly in normal times. Both policies, in truth, are the same—let the market heal itself. But both are buying “political insurance” by throwing money around we do not have to spend now or in the future.

The Chinese national interests are likely well served by diversifying into commodities and other real assets, the value of which is not contingent upon an overleveraged debtor nation. But as long as China reasonably evaluates the trade-offs, it likely will continue to buy US debt since a faster recovering US economy is the best Chinese medicine as well.

The Chinese are our friends, in no small measure, because they have the capacity through their warnings and call for fiscal discipline to constrain the inexperienced in our Government and the ravenously political in Congress from blatantly printing money.