Financial Warfare

Don’t count on China helping fund much more of America’s growing mountain of debt.  Better to wonder how long it will continue holding all the US Treasury debt it currently has.

That’s because things are escalating between the US and China.  It has gotten to the point of official name-calling.

China holds $1.08 trillion of US Treasury debt.  Stated differently, China’s government is a creditor of the US government.  It has loaned the US more than a trillion dollars.  The only other country that loans Uncle Sam that kind of money in Japan.  It has loaned the US—the world’s biggest debtor–$1.27 trillion.

Right now, the US needs all the creditors it can find.  That’s because its borrowing appetite is off the charts, gorging on $4 trillion or more in fresh borrowing this year alone.  And when you need to fund a $27 trillion dollar national debt, you need all the lenders you can get to stay afloat.  

About $7 trillion of the US national debt comes from foreigners.  Including China.  Those countries don’t lend us that money just because they like us so much.  They do so because it meets their needs to have dollar reserves for settling cross-border commerce and debt obligations and to provide some underpinning for their own currencies.

But China could probably lighten up its Treasury holdings considerably.  Russia, until recently a major US creditor, dumped most of its dollars.  And put the money in gold instead.

So, here’s what’s on the agenda:  Trouble over Hong Kong.  More trade conflict.  Claims against China for COVID-19.  Congress has passed a human rights sanctions measure against China, now in the President’s hands.  Huawei.  China’s talk of retaliating against the Huawei ban with its eye on Boeing, Tesla, and Apple.  A growing pushback against Chinese students studying in the US.  Claims and counter-claims in the South China Sea’s shipping lanes.  Plus China’s considerable debt problem of its own.

Financial warfare is about to break wide open.

It’s not hard to imagine a sea lanes incident or accident that leads to hot warfare.  Especially in an election year.  When the tinder is ample and dry, it doesn’t take much to spark a conflagration.  (Look up the assassination of Archduke Ferdinand as an example.) 

Today there is more dry tinder in Sino-American relations that there was in the Balkans in 1914.  

Just as it’s a safe bet that gold prices will be higher next year, it’s a safe bet that China won’t still hold $1.08 trillion in US Treasury debt next year.  And that will mean more Fed money printing to fill the gap.

And that will make the higher gold price part of the bet a sure thing, too.