Daniel J. Ikenson
The U.S.-China trade war has reignited debate over the question of whether Chinese ownership of U.S. government debt is an asset that Beijing will weaponize. In other words, is the possibility that the Chinese could sell off large swaths of their $1.1 trillion holdings of U.S. treasury securities, causing bond prices to fall and interest rates to rise, something that should concern U.S. policymakers? Although profligate spending and an accumulating national debt may well be the toxins that eventually destroy the U.S. economy, the fact that the Chinese own some of that debt neither gives Beijing leverage over U.S. policy nor does it present a threat to the U.S. economy.
The fact that the Chinese own U.S. government debt neither gives Beijing leverage over U.S. policy nor does it present a threat to the U.S. economy.
For starters, consider why the Chinese buy U.S. debt in the first place. For two decades, the Chinese have been purchasing U.S. treasuries not as a favor to the citizens of the United States, but because it has been in China’s interest to do so. Nobody in Washington forces or begs the Chinese to buy U.S. debt. All by themselves, the Chinese (like investors at home and across the globe) see the value proposition. It just so happens that U.S. government-issued debt securities are considered the least risky investments in the world. Investors know their assets are safe, accessible, and guaranteed to be repaid virtually on demand.
That’s not to say Americans haven’t benefited handsomely from China’s investment decisions. The inflow of Chinese (and other foreign) capital to U.S. debt and equity markets has helped keep interest rates well below historical averages, effectively serving to subsidize U.S. consumption, which, in turn, has kept Chinese factories—as well as factory workers, software engineers, designers, accountants, and sales representative in other countries (including the United States)—humming along for decades.
Another reason for China’s appetite for U.S. treasuries is that purchasing dollar-denominated assets helps prop up the value of the dollar, which is an outcome that has been favorable to Beijing from an exporting perspective because U.S. demand for Chinese goods tends to rise with the value of the dollar. Meanwhile, over the years, a strong or strengthening dollar has helped preserve the value of China’s existing portfolio of U.S. debt and other dollar-denominated assets.
In summary, U.S. treasuries are attractive investments to the Chinese because of their limited risk, relative liquidity, impact on U.S. interest rates (i.e. demand for Chinese goods), and impact on the value of the dollar (i.e., demand for Chinese goods; value of Chinese-owned U.S. asset portfolios).
Second, even if China did want to sell treasuries (for reasons belligerent or benign), the impact wouldn’t be profound unless massive amounts of selling were undertaken abruptly. But that approach almost certainly would hurt China more than the United States. China’s debt portfolio, which is valued currently at just over $1.1 trillion, would fetch far less as the fire sale caused bond prices to drop—a 5 percent price decline, for example, could amount roughly to a $50 billion loss for Chinese investors. Meanwhile, the resulting higher interest rates would be short-lived, as demand for U.S. debt from other investors would pick up the slack.
Consider Figure 1 (nearby), which depicts total U.S. debt, total foreign-held U.S. debt, and Chinese-held U.S. debt. Total U.S. debt in 2018 was about $21.5 trillion. Foreigners held $6.3 trillion (30%), of which Chinese investors held $1.1 trillion (5%). Chinese investors are the largest foreign holders of U.S. debt, but the value of those holdings accounts for just 17% of all foreign-held U.S. debt and only 5% of total U.S. debt, which indicates that U.S. debt is a popular investment choice. In other words, if China were to sell its treasuries, it is very likely that there would be sufficient demand in other countries and in the United States to keep interest rates from rising significantly. And if interest rates remained steady because non-Chinese demand for U.S. debt picked up the slack, then China’s selling will have had no “strategic” impact.
So, it seems that China could create, at most, a short-term problem for the United States by dumping its treasuries, but only if Beijing is willing to absorb a big loss. That seems unlikely.
Now, factor in the phenomenon known as “flight to safety” or “flight to quality” and the notion that China can use its debt holdings to exert any influence over U.S. policy becomes untenable. As my colleague Logan Kolas wrote recently:
Demand for U.S. debt tends to rise in the midst of global crises. U.S. treasuries are considered the safest assets in the world, so investors often turn to them during times of financial strain. Increased tensions caused by escalating tariffs and trade wars induce policy uncertainty and perverse economic decisions.
Paradoxically, even if the crisis is precipitated by the U.S. government’s firing of the first shot and its escalation of the trade war, the ensuing global uncertainty encourages foreign investors to lend more money to the offending government because it is trustworthy.
Figure 2 (nearby) plots a Policy Uncertainty Index alongside the value of foreign-held U.S. debt. It suggests a positive correlation between the two and supports the conclusion that any precipitous, unexpected, or unconventional policy measures undertaken by governments that can shake markets, including measures intended to drive up U.S. interest rates, will increase demand for U.S. debt, which will keep those rates low.
Beijing understands this and will not weaponize its U.S. debt portfolio.Daniel J. Ikenson is the director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, focusing on WTO disputes, regional trade agreements, U.S.-China trade issues, steel and textile trade policies, and antidumping reform.
DUH: HUD Housing Should Put Americans First
by Michelle Malkin
We no longer live in a constitutional republic. We live in an idiocracy.
Only in modern-day America, under the Democratic-controlled U.S. House of Representatives, is the basic proposition that federally subsidized public housing should benefit American citizens and legal residents slammed as “despicable” and “damaging.”
Those are the hysterical words used by Democratic Rep. Carolyn Maloney of New York City to condemn the proposal discussed by Housing and Urban Development Secretary Ben Carson on Tuesday to ban government aid to residents of HUD who shelter illegal immigrants. The rule change would end a Clinton-era regulation that allowed immigrants to obtain aid without having to disclose whether they were here legally. The Trump plan could free up an estimated 32,000 public housing slots, according to HUD, as 1.6 million applicants nationwide wait to be considered.
Democratic Rep. Juan Vargas of San Diego County couldn’t believe Carson could be so “mean-spirited” in prioritizing law-abiding people over law-breaking ones.
Democratic Rep. Maxine Waters of Los Angeles called the illegal alien prohibition “cruel.”
Only in America are American public servants, who are sworn to uphold American laws and the U.S. Constitution, hounded by open borders liberals about putting Americans first. Instead of being forced to defend their own twisted and treasonous priorities, Democrats got an assist from open borders tools in the media making hay of Carson’s unfamiliarity with some stupid real estate acronym. The squirrel-chasers at Newsweek sputtered: “Ben Carson doesn’t know what an REO property is, thinks he’s being asked about Oreos.” Politico clucked: “Ben Carson confuses a real-estate term and a cookie.”
Fake news narrative set: He’s dastardly, dumb and hates immigrants!
Carson had patiently explained at the House Financial Services Committee hearing that families with illegal immigrants would still have up to 18 months to defer eviction and find somewhere else to live or to move back to their home countries. But that (undeserved) generosity was met with still more unhinged cries of “What about the children?” from the “America Last” Democrats whose first allegiance is to thousands of anchor babies born here to irresponsible border-trespassers, visa overstayers and deportation fugitives. They put their own children at risk in the first place. Not us.
You want to engage in “What about-ism?” What about the native-born military veterans? What about the elderly? And what about the destitute citizens down on their luck waiting for public housing slots to open up?
In Maloney’s city, it reportedly takes an average of 99 months for a HUD applicant to secure an apartment.
In Waters’ city, the waiting list for low-income Americans seeking Section 8 vouchers is 40,000 people and up to 11 years long.
In Vargas’ county, the region now boasts the fourth-highest homeless population in the nation.
It is “only logical,” Carson pointed out, to put Americans ahead of the 32,000 HUD-housed residents deemed ineligible because of their immigration status. But logic is toxic to the Make America Disappear Lobby.
When I hear the impassioned paeans of Democrats on behalf of illegal immigrants fighting for their federal Section 8 vouchers, I am reminded of the most notorious deportation-evading denizen of government-subsidized housing: Zeituni Onyango, President Obama’s illegal immigrant aunt, who died of cancer in 2014.
Remember? Onyango was a beneficiary of the welfare state run amok, and a perfect symbol of open borders ingratitude and metastatic entitlement. She overstayed a temporary visa for 14 years, never going home to Kenya. Screw our rules. Onyango had no job skills, no special talent and no claim of persecution. She didn’t value the American dream. She was a dependency nightmare. She collected $700 a month in welfare benefits and disability payments totaling $51,000. Somehow, Onyango also drummed up money to apply for asylum and finagled her way into federal and state public housing in Boston.
She gamed the system under both Democratic and Republican administrations, dragged out her phony “asylum case” three times, dodged two deportation orders, illegally donated to her nephew’s presidential campaign along the way, and then eventually secured a green card in 2010. Such are the perks of illegal immigrant privilege.
In a raging interview she gave to a Boston TV station before she died, Onyango savaged and taunted her American hosts. “If I come as an immigrant, you have the obligation to make me a citizen,” she spouted. “I didn’t ask for it,” she retorted when asked about her public housing benefits. “They gave it to me. Ask your system. I didn’t create the system.”
Well, Obama’s ingrate aunt was right about that: She didn’t create the system. Idiocrats built it. Idiocrats are defending it. And idiocrats would rather mock Carson’s ignorance of a real estate acronym than own up to their own suicidal stupidity.
Here’s the only acronym you need to know if idiocrats prevail: R.I.P., America. R.I.P.