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This ad promotes an awful misunderstanding of sovereign debt, and especially sovereign debt in a flexible exchange rate world. By buying US treasury debt the Chinese government are screwing up their own future, they are not "buying America".

The ad is powerful, went viral on the Internet almost immediately. Fox and Fox Business News played it for days.

Purchasing a company's bonds is sometimes employed to force reorganization and gain control of companies. It's not that far fetched.

Martin Wolf, Steve Hanke and others see the US as having launched a currency war. Thus far the Chinese have held their own.

How does this ad differ from the 1980s Japan scare? Recall that US sovereignty was supposed to be threatened because "the Japanese" had purchased US assets including Rockefeller Center. I remember images of the Japanese flag flying over various national icons such as the Empire State Building. "We" will end up "working for" "the Chinese" only if "they" invest in the US. What would be the bad part of that? Let a hundred investments bloom.

I'm not sure I see how the Chinese state could leverage its creditor position to alter US central government policies. Wouldn't the threat of US default actually weaken the bargaining position of the Chinese government? I'm not sure I understand how all this really shakes out even assuming continued expansive borrowing by the federal government.

Well it certainly is a scare tactic. In as much as it might make people more aware of our excess debt then it might be useful.

However, It is an important question to ask, who is the master and who is the slave? The borrower or the Lender?

The Lender must certainly try to prop up a worrisome borrower if he wants his money back.

The problem with our debt is not that it is owned by other nations, it is a problem because it is excessive and will require larger and larger shares of our income to service it.

I'm willing to give it a charitable ear and admit that a lot of people probably need "China" as a boogeyman to personify subservience to the public debt. But in the end it's mostly fed by economic illiteracy, the trade-deficit folly being the first. At least I know that it's not demagoguery to get the "lowest common denominators" riled up, that's one thing the people at Citizen Against Government Waste honestly fear.

I took the ad as aimed at US debt, not the Chinese. It's primarily about us, not them.

The Chinese professor is giving a lecture on how great nations go into decline. They do so by abadoning their principles. That's a pretty good message, I thought. The tag line ads humor.

The ad most reminded me of the famous Apple ad against Big Brother (IBM). Shown only once during the Super Bowl, it is iconic. I first saw it in a management class at Stanford Business School.

The analogy with Japan holds only up to a point. The Japanese were allies and did not threaten perceived US strategic interests. The Chinese are viewed as threatening US strategic interests in East Asia. That is why we've made nice with India.

I think the debt owned by China takes on an additional dimension to the degree one sees China as a strategic threat. Whether you do or not, you must understand that they -- especially but not only the PLA -- do see us that way. And that will cause them to behave in ways that credit those here who also see them as strategic threats.

To me, it's a topic for good game theorists. Are the US and China in a prisoners dilemma? Not so if you take Roger's trade and investment perspective. Very much so if one views the two nation as (potentially) in conflict. Or believing they are.

Would China declare war on us if we renege on our debt?

Doesn't the US also have a ton of leverage over the situation? If the United States no longer imports goods from China, all that capital forcibly accumulated in China, built to satisfy American tastes, quickly becomes worthless. Although, it's not much of an incentive if the CPC only looks at capital aggregates.

Correct me if I'm wrong, but didn't the Chinese have their own "stimulus package"? Wasn't it much larger in terms of its size relative to the size of the Chinese economy than the US "stimulus package"?

The Chinese believe the economy is a zero sum game. And their economy is mercantilist in nature (reflecting both the zero-sumness of their thinking, and the transition from controlled to market economy). Keep these things in mind.

"I am not sure why the Chinese rejoice at the idea of owning American debt in such scenario (of the US as a nation failing)"

Maybe the Chinese are betting on taking ownership in bankruptcy court.

I think that the reason for "merchantilism" from the Chinese is tied up with their internal politics.

For many years I've dealt with Chinese and Asian companies in my work in the electronics industry. The governments of those countries are certainly very favourable towards them. The electronics market is quite complex, but it generally works like this: Chips are designed in the West or Japan, they are often made in Asian developing countries though not always (they are rarely made in China). They are combined with other components made in Asia. The assembly is then done in China or another developing asian country. This final assembly is done by an "ODM" who then sells the product to an "OEM" which is a company you'll have heard of like Apple, Nokia or Dell. System design can be done by the ODM in Asia or by the OEM somewhere in the west. The OEM takes care of customer support, marketing, sales, distribution and most software.

The effect of the merchantilist policies of countries like China, Japan and South Korea is to enrich the large corporations there. Export industries such as electronics generally require a larger organization than internal industries. Internal service industries can be very small. So, the policies benefit large existing businesses. This policy may be followed because of simple corruption, but I think the reasons are more complex.

Firstly, during the crisis the problem in China has been to prevent a short-term increase in unemployment for social reasons. The Chinese government are afraid of civil unrest if the number of unemployed young men in cities becomes too great.

Secondly, the corrupt nature of their internal economies makes them poor investment targets. I think what worries the Chinese is that if they cease subsidising the large exporting companies through merchantilism then investment would focus more on internal goods and services companies. But, the large exporting companies trade on the world market - which keeps them clean. However, the smaller internal companies don't. So, they are subject to localised corruption. I think the Chinese government fear that this localised corruption would be worse for long term capital accumulation than subsidising exporters.


There are lots of actions short of war. Right now China is reportedly restricting the supply of rare earth minerals to the US. Remember the incident with the US war plane some years ago.

Current's comments explain why we are not in a position to suddenly cut off trade with China.


I believe you are correct. That was the economic error in the ad that I picked up on. But the overall message is correct: the US has backed away from its own principals.

The Chinese have adopted the East Asian model for development. China's leadership looks to Singapore for its economic model; and in the long run, perhaps its political model, too.

Current is surely right in focusing on the social issues in China. US leaderhsip seems clueless about understanding that. And I agree that investment in Chinese enterprises has had disappointing results.

Check out Cochrane's take on this issue :

The big problem is that the US government doesn't like the status of debtor nation anymore and wants to move towards reducing current account deficits and push for export growth and this can only be done if the Asian countries, China in particular, reduce their, right or wrong, surplusus to create the demand for US goods.

BTW,the same thing happens in Europe, with France, ever since the crisis started, and then all the more indebted Southern European countries calling on Germany to increase internal consumation in order to stimulate the recovery in these countries.

Professor O'Driscoll,

I believe you are right about the strategic issues regarding the US position. I think it's very likely that the US government, or sections of it, believes that to maintain its power and proeminence in the international system it should become, in the medium and long run, a creditor country, just like in the decades after WW II. But the most pressing on the table there now is a policy issue, namely how to keep demand up given now that the stimulus has run out, the continuing process of deleveraging and banking problems and the increased pressupre to eventually start reducing the public deficit and debt...Hence the diplomatic tour de force of Treasury Secretary Geithner and other high ranking officials in the last year or so.

Bogdan, Thanks for the comments.

How pathetic that ad was! Blatant fearmongering... The Austrians and their luddite ways are exposed!!!

Right . . . the Austrian economists are the luddites . . . right . . . It's not the anti-growth postmodern left. No, not them.

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