10.05.2010 in Economy, Politics by Robert Romano 1

The China Problem

Are U.S. taxpayers helping China to modernize its armed forces via interest payments owed on the national debt?

Every year, the U.S. pays out substantial interest on its now $13.6 trillion national debt. In 2010, those interest payments totaled $203 billion based on the latest numbers, some $15 billion more than the White House Office of Management and Budget (OMB) had projected earlier this year.

China holds $846.7 billion in treasuries as of July, approximately 6.22 percent of the total debt, which means it probably collected more than $12.6 billion in interest payments last year alone. In the great scheme of things, that may not seem like much. But with an annual defense budget of $77.95 billion, those interest payments currently constitute about 16 percent of China’s military spending.

Alarmingly, China’s military spending was up 7.5 percent from the year prior. That’s about how much interest owed on the debt grew from 2009 to 2010, from $187 billion to $203 billion, an 8.5 percent increase. The more taxpayers chip in via interest payments, the larger China’s military grows.

Consider this: By 2020, OMB estimates net interest owed on the debt will total $840 billion. If China keeps a consistent share of the debt, its annual interest paid will more than double to $52.2 billion every year. That’s more than two-thirds of China’s current military budget. So, the rising cost of interest owed on the debt is helping to directly fund a dramatic expansion of the second largest military in the world. That’s not even counting the revenue China generates every year because of the trade deficit.

Robert Kaplan, a senior fellow at the Center for a New American Security, wrote in the Washington Post on September 26th about the rapid rise of China as a major naval power. Of course, one of the primary reasons for the United States’ superpower status, besides nuclear weapons (as in conventional wisdom), has been control of the seas. Winning the battle of the Pacific in World War II required the extension of the Navy to get within striking distance of Japan for an invasion. The atomic bombs were an innovation that negated the need to invade, but the prerequisite to winning the war was the conventional building and expansion of naval and air forces, and then projecting those forces across the Pacific.

The importance of naval supremacy dates back centuries: It was the key to the British Empire’s rise, it was how the New World was settled and secured, etc. China’s steps in this direction are deeply concerning for the balance of power in the East, but also as it relates to U.S. security and economic interests worldwide. As Mr. Kaplan notes, some 90 percent of global commercial trade occurs by the seas.

Couple that with reports by Bloomberg News that China is busy securing a worldwide monopoly on rare earth metals used in U.S. smart bombs, silent helicopter blades, missiles, and tank guns. In July, China reduced its export quotas for these metals by 72 percent. Unfortunately, the U.S. outsourced production of these metals almost a decade ago. The nation could mine these metals in California’s Mojave Desert, but that state’s environmental restrictions will make it difficult.

In the meantime, prices have soared on these metals — yet another tax to the Chinese.

Mr. Kaplan makes the point that the U.S. is currently distracted from the growing danger posed by China. Unfortunately, confronting the China problem is barely on Washington’s radar. The nonsensical claims of currency manipulation are the least of our problems. Rather, through the contraction of yet more debt, the American people are financing the growth of its principal rival.

Add that to the list of terrible things happening because of the spiraling $13.6 trillion national debt: destroying the dollar, planting the seeds of inflation, threatening a credit downgrade, higher interest rates, and higher taxes, bankrupting the country, and now, arming America’s adversaries.

As noted above, a lot of that interest owed flows directly to China. It’s a tax. A tribute, if you will, that is allowing the nation not only to modernize and build new infrastructure, but to expand its own force posture. This will not bode well in the future for Taiwan, South Korea, Japan, Australia, and other Eastern allies. That we are funding the Chinese military buildup is beyond question, through interest owed, through the trade deficit, through our own economically uncompetitive global posture. How this buildup is directed, whether it is used for conquest or peace remains to be seen. The history of authoritarian regimes suggests that it will be the former.

If not militarily, politically we are completely unprepared for this challenge. Right now, the American people are rightly focused on America’s disastrous economic, fiscal, and monetary policies that are wrecking the American Dream. They want change — and courage — in the Capitol that has not been seen in years.

The nation’s imminent credit downgrade, due in 2018, if Moody’s and the CBO are to be believed will be a tipping point geopolitically. The costs of the security umbrella provided by U.S. forces will become untenable as entitlement spending grows out of control. In many ways, restoring the nation’s balance sheet, both on the budget side and the central bank side of the equation, is essential to preserving that umbrella that has protected the Americas, Europe, the Middle East and the Far East from expansionism by totalitarian forces for decades.

The nation must examine if a downgrade is even avoidable. If it is not, policymakers must examine how to get the U.S. back to Triple-A status as soon as possible. A downgrade could wreck the dollar, the world’s reserve currency, perhaps irreparably.

If we cannot pay our debts, our creditors will one day demand a different means of payment. That’s when everyone will be trading their dollars in for something else. China is poised to be the chief beneficiary of these developments. They don’t need us — contrary to those who believe that China has a vested interest in America’s financial stability.

If we go down, they go down, the argument goes. Our two systems are tied so closely together, China is dependent on our markets to sell their goods, etc. This argument in itself will not prevent us from going down in spite of all good reason. Even if the Chinese believe they have a vested interest in our financial stability, their policies are not geared to shoring it up. Nor can they prevent a downgrade.

In fact, they are preparing for it. China’s leading credit rating agency has already downgraded the U.S.. Those who believe that China is not on a path to supplant the U.S. as a superpower underestimate their posture and their actions. A lower credit rating will mean even higher interest owed to the Chinese.

Those interest payments are going to bring the U.S. to its knees, financially, economically, militarily, and politically. If something is not done immediately, decline is inevitable. No superpower has ever lasted being the world’s greatest debtor. Superpowers start out as creditors, as the U.S. did, and as China is doing now.

If we do not stop what we are doing financially, monetarily, and fiscally — destroying the dollar and bankrupting the public treasury — the 21st Century will not be an American century. We will no longer be the masters of our destiny. We will be a vassal.

The argument for fiscal and monetary sanity in Washington is linked to America’s ability to project power overseas when it becomes necessary, as it has become every decade or so since the 20th Century began. “Our national debt is our biggest national security threat,” Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff, has said. He is right.

Linking these two issues together is critical. Calling attention to the imminent credit downgrade is critical. Alerting the American people to their growing tributary status via interest payments to China and elsewhere is critical. Tackling sacred cows like paying down the debt (it hasn’t happened since 1958), not destroying the dollar (it’s been in decline ever since the nation went off the gold standard), and reining in entitlement spending (which will be our ruin) is not a job for politicians and pollsters. It is a job for real leaders.

Robert Romano is the Senior Editor of Americans for Limited Government.

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