The paranoid ravings of an old crank (me)

Everyone knows that China lends the U.S. a ton of money. And nearly everyone believes that China does this, in part, to keep the yuan cheap so that the U.S. will buy more Chinese stuff and thus preserve Chinese jobs and keep the Chinese people from rebelling.

But Brad Setser implies that there's something else - something deeper and possibly more sinister - going on here:

Recently China has been providing the US with more financing well in excess of what the US needs to pay for its imports from China...

Flows from China’s government now are larger, relative to US GDP, than flows from Japan’s government and safety-seeking private investors ever were...For that matter, flows from China’s government now are larger that total flows from Japan — counting all private Japanese investment in the US — ever were.

And China, unlike Japan, isn’t part of a security alliance with the US. That is why the scale of financing the US now receives from China truly is unprecedented: it is now not only tops the largest inflow the US ever received from another country, but it is clearly by far the largest inflow the US has ever received from a government that the US doesn’t consider a close military ally.

When I see words like "military" and "ally" creep into columns about finance, I start to worry. Could it be that China's massive and unprecedented lending to the U.S. has some geopolitical motivation?

The fact is, I don't understand geopolitics enough to be able to guess what such an ulterior motive might be...and so this blog post probably belongs in the "paranoid ravings" category. But, that said, if there's any good place for paranoid ravings, it's in a little-read personal blog.

One geopolitical motivation for Chinese lending to the U.S. might be simple creditor leverage. If we owe China money - and are forced to keep borrowing from China just to roll over our debt to China! - then they have a say in all our government policies. And since we are their major rival for geopolitical power an influence, having us owe them all that money is kind of like an insurance policy for them. It assures we don't try too hard to interfere in their "peaceful rise."

A darker interpretation - and an even more paranoid and implausible one, I should add - is that China is lending money to us n order to precipitate our rapid decline. This sounds weird - who ever heard of trying to bring down a great power by offering it cheap cash? But then again, trying to bring down a great power by outperforming its economy in peacetime must have sounded pretty preposterous...before we did it to the Soviet Union.

Some historians have noted that hegemonic powers often go into deep debt just before they decline. Although it's not clear if debt causes or is caused by decline, there's at least a non-crazy argument for "cause". When a country becomes so powerful that it has few real rivals, it may be that the country's politicians start to fight amongst themselves - offering bigger and bigger payouts to domestic constituencies, even at the expense of the nation's long-term economic well-being. Republicans, desperate to secure a "permanent majority" during the Reagan and Bush years, were willing to saddle America with $11 trillion (that's $11 million million) of debt. In the past decade, most of that debt has been borrowed not from domestic investors or even individual foreign investors, but from the government of China.

So America's very success (last century) may have caused our politicians to become short-sighted and irresponsible. Like a college freshman with his first credit card, we may have taken to borrowing more than we can afford to pay back - a mistake that will come back to haunt us. And like the credit card company with the big pretty booth at freshman orientation, China has been there to feed us more and more lines of credit.

Was this on purpose? Did China realize that America was in the mood to drink the poison of "free" money, and act accordingly to ensure that they have no real rivals for geopolitical power in the 21st century?

Probably not. This is probably a kooky, cranky conspiracy theory with no basis in fact. But it nags at me all the same. And every day, our debt to our most powerful rival goes up, and up, and up.