In Which I Get a Question Answered on PJTV

January 11th, 2011

By Brianna Aubin

A couple of weeks ago, the Front Page did a segment on how China might well be one huge investment bubble right now, with currency inflation, bad debt on the government books, and a property bubble larger than the one we had in the U.S.  So I commented:

Thanks for going into what China’s potential bust means for the U.S. and U.S. debt.  Just out of curiosity, would some of that bad debt China’s hanging on to happen to be in the form of U.S. government bonds?

In turn, my comment was commented on by Terry Jones in a member’s only segment.  For those who are not PJTV members, I will type out the response:

Our exposure is probably relatively limited. What China did was they printed a lot of money, and basically funded a massive real estate boom that really dwarfed ours in its size, it was an enormous real estate boom.  And a lot of those loans are not good, they’re not being paid on.  But China, because they basically control all the banks in the finance system, they in essence can say, “Well, we’re going to keep those on and pretend they’re good.”  Well that will work for a while, but at a certain point the game has to end, and when it does they will have a very serious real estate collapse, and I’m afraid a lot of the loans that they made, that the government made, are going to go bad.  They can cover this up with the fact that they run a rather large trade surplus, and they do own a lot of US government bonds.  I mean, last July (2010), I think they had about 900 billion officialy, 900 billion in US treasury and other debt, but they in fact have much more than that, by some estimates 1.7 or 1.8 trillion dollars in US debt.  So one of the concerns that we need to have is that if they should have a domestic meltdown of their financial system, they would begin cashing in US bonds, selling US bonds in a massive way, and that could be very disruptive to our financial markets and send interest rates soaring here.

Thanks Terry!

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One Response to “In Which I Get a Question Answered on PJTV”

  1. Tom Carter |

    Interesting. I confess to not having a solid grip on this whole problem of U.S. debt held by China. I understand some of the pieces — bonds, trade balances, artificially valued currency — but I don’t see the urgent problem. And I don’t understand how Jones got from 900 billion to 1.8 trillion or how China could suffer the kind of economic collapse that would drag us down with them. Aside from from the meltdown factor, there’s also no reason China would call its U.S. debt — huge bond sales, etc. It would hurt them as much as us.

    Aside from all that, seems to me the thing we have to do is get our deficits and debt under control and begin to back out of the problem.

    No wonder they call it the dismal science!

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