China Admits US Debt Is Losing Favor

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Analysts who watch the interest rates that the US must pay on its debt should have felt a little shiver yesterday. The Chinese government, the largest holder of Treasuries, expressed some doubt about the turnaround of the American economy and came a bit too close to stating that US paper might be becoming less attractive as the government borrowing to stimulate the economy and save financial institutions makes American debt a more risky investment.

According to the FT, the Chinese premier said, “We have lent a huge amount of money to the United States. Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the US to maintain its good credit, to honour its promises and to guarantee the safety of China’s assets.”

Since the price of credit default swaps on US Treasuries is going up, the financial markets share some of China’s concerns.

It would be nice to believe that there are no storm flags up as the US goes further and further into debt. But, the combination of what is likely to be falling tax revenue due to the recession and increased spending to bailout a rising number of segments of the economy as they falter means that the costs of getting GDP back into green numbers is rising by the day.

It may be that the Administration and Congress will be faced with the limits of American borrowing power sooner than they realize. It will come as a shock that the supply of capital for the government is not limitless. But,  the fact is that the walls are closing in.

Douglas A. McIntyre