credit: Lars Plougmann
Is there a “Plan B?”
- Countries like the U.S. sell government bonds to raise money. Bonds are a form of debt – when the bond-holder cashes in their bond, the government has to pay them back with interest.
- China is the biggest buyer of U.S. Treasury bonds, which means that if it suddenly sold off a lot of them, it could screw up the entire U.S. market.
- A dramatic change like that would also hurt China’s economy, so there are probably only two situations in which China would consider selling off that much U.S. debt:
- China and the U.S. get into a serious fight. Like, a military-style fight, probably over resources in Asia
- China starts to think the American dollar is going to totally tank, and gets out while it still can
- So what’s Plan B? There is no official plan, but the U.S. government would probably start asking its own citizens and its friends around the world to buy a whole lot of bonds. And the Fed would have a much bigger problem on its hands than the recession.
Facts & Figures
- China is the United States’ biggest creditor in the world
- If you include Hong Kong, China holds almost $1 trillion in U.S. debt
Best Quotes
“I worry that we could be at a tipping point.” – Eswar Prasad, economist at the Brookings Institution, former IMF official
“The U.S. government should have and maybe still could call on the people of the U.S. to invest in U.S. debt…. What we need to do is have a plan that’s reasoned, reasonable, can reassure our foreign lenders and also demonstrate to the American people that Washington can get something done” – David Walker, former U.S. Comptroller General
What do you think?
How has your life been affected by the rise of China?