Niall Ferguson’s latest Newsweek column suggests the latest debt-limit deal left our Chinese creditors unimpressed.
The antics of American legislators take on a new significance when you realize how our leading creditor interprets them. As Beijing sees it, the last three months have furnished ample evidence that—regardless of what the American rating agencies may say—the United States is no longer creditworthy. Even if Congress has pulled back from the brink of outright default, many in China view the debt deal as at best a temporary fix. As the Xinhua News Agency put it, the 11th-hour deal has “failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer.” Meanwhile, the unspoken intention of the Federal Reserve is to debase the dollar through “quantitative easing,” which translates into Mandarin as “printing money.” (It’s no accident that one of the bestselling economics books in China is called Currency Wars.)
So the Chinese have skin in this game. And their U.S. exposure doesn’t stop there. In order to prevent devaluation of their dollars, they have no option but to keep buying yet more dollar-denominated securities. That strategy suits their exporters fine, since it keeps their goods competitive in the American market. But what if the effect of last week’s debt deal, which mandates deficit reduction of $2.1 trillion over the next 10 years, causes a further slowdown in U.S. growth? Not so good.
