Spending Cuts, Tax Increases Will Be Necessary 06.03.09  

China Increasingly Unreliable as a Buyer of U.S. Debt

Bloomberg Reports

The US will be auctioning trillions of dollars of Treasury bonds in the coming months and depends on China to buy a goodly portion of those bonds. But China, which holds roughly $750 billion in US Treasuries, is issuing warnings about the dollar and worrying about their mountain of US Treasuries. China is increasingly worried about the US continuing to issue new oceans of debt. US Treasury Secretary Geithner has been getting an earful from Chinese officials on his trip to China regarding their worries about the dollar and Treasury bonds.

Meanwhile, skeptical China is arranging swaps with its business friends, such as swapping yuan for Brazilian reals, so the two can do business with their own respective currencies while bypassing the dollars that would ordinarily be used in commerce. With the dollar in danger of losing its AAA rating, it's no wonder that many countries are trying to do business while circumventing the dollar. The great fear from the US standpoint is that one way or another, the US dollar might lose its reserve currency status.



Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending. The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13% of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”

Richard Russell comment -- If the Fed won't monetize the debt, where's the money going to come from? Oh yes, I forgot about good old China. As for "cuts in spending," the next target is going to be our outrageous spending (half a trillion a year) on our military and its 130 outposts across the planet. Of course, the military-industrial complex will have some words to say about cutting military spending. Shortly, we'll see who runs the country. I wouldn't want Obama's job.


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