China worried US may spend too much; seignorage as ‘too big to fail’

One trillion dollars of debt later  and China expresses concern about the fiscal habits of the United States. I have some great mortgages they should consider at much higher yields than US govvies. Perhaps China could hire one of the rating agencies for some due diligence.

The Associated Press reports (h/t www.twitter.com/tliacono):

“China is telling the U.S. to be careful, not to overspend and keep an eye on the dollar,” said Kelvin Lau, regional economist at Standard Chartered in Hong Kong. “There are risks that China cannot control, so they’re depending on the U.S. to maintain fiscal prudence and keep the dollar reasonably stable.” (emphasis added)

Analysts estimate China keeps nearly half of its $2 trillion in foreign currency reserves in U.S. Treasuries and notes issued by other government-affiliated agencies.

The AP story goes on to explain that Premier Wen’s speech about his concerns vis-a-vis the US sovereign debt is part of a power play ahead of the G-20 meeting of finance officials this weekend.

“Inside China there has been a lot of debate about whether they should continue to buy Treasuries,” said Frank Gong, chief China economist for JP Morgan.

Beijing is trying to increase its leverage at the London G-20 meeting by reminding its partners of its role in financing U.S. spending, Gong said.

“Without China’s buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment,” he said. “By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting.”

Financial sabre-rattling. But if  the US and related agencies owe China $1 trillion would it really be wise to undermine the stability of dollar-denominated debt? The privileges of seignorage (i.e., as Numero Uno Debtor) in this century may be another term for “too big to fail” — maybe even too big threaten.

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