Sunday, November 22, 2009

Hu Jintao Wants a Kiss from Barack Obama

Last night's opening skit on SNL pilloried President Obama's trip to China and his attempts to lecture its leaders. President Hu Jintao responded by coarsely reminding Obama which country owes the other $800 billion. Obama replied with a firm promise that the money is certain be repaid.

INTERPRETER: Are we? Are we going to get our money? Because from what I read your country is in the middle of a serious recession.

OBAMA: Uh, while this is true, there are signs that our bailout has steadied the financial markets and our stimulus package has been effective in fixing the job crisis.

(Hu Jintao "speaks.")

INTERPRETER: I'm curious. How many jobs has it created?

OBAMA: Uh, so far, none.

(Hu Jintao "speaks.")


OBAMA: But our health care reform plan, we're confident, is going to lead to enormous savings.

(Hu Jintao "speaks.")

INTERPRETER: How exactly is extending health care coverage to 30 million people going to save you money?

OBAMA: I... don't know.

(Hu Jintao "speaks.")
INTERPRETER: You know, as I listen to you, I am noticing that each of your plans to save money involves spending even more money. This does not inspire confidence.

OBAMA: I assure you, you're going to get your money.
(Hu Jintao "speaks.")

INTERPRETER: Will you kiss me?

OBAMA: --- --- --- I'm sorry?

(Hu Jintao "speaks.")

INTERPRETER: Will you kiss me?

OBAMA: --- I don't understand...

(Hu Jintao begins screaming)

INTERPRETER: I like to be kissed while SOMEONE IS DOING SEX TO ME!

Funny, in a bittersweet way. After all, Doug Hornig of Casey Research poses the serious question alluded to by SNL: what if they stop buying our debt?

As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.

Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.

Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases -- trade surpluses -- has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase... As the chart below illustrates, sales of long-term bonds to foreigners are way down.

So what does all this mean? ...It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over -- and the unwinding process has just begun.

Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.

As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on 'auto-pilot' and quickly headed to the point where they will negatively impact, not help, the deficits.

Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.

The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.

Those who don't learn from history are indeed doomed to repeat it. For this reason, an ironclad case can be made that today's Democrat Party is psychologically unfit to serve.

Hat tip: Casey Research. Linked by: Legal Insurrection. Thanks!

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