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A Must-Read on China and the Deficit

Chris Hayes had a great column in The Nation last week about the totemic status of our debt to China:

But if domestic Chinese concerns about the country's monetary codependence with the United States explain some of the statements of the country's leaders, they don't explain why the US media and commentators seem so intent on giving the story maximum play.

The answer to that, I think, is politics. It's increasingly clear that China has replaced the bond market as the nebulous specter that fiscal hawks will use to justify domestic austerity. In the 1990s Bill Clinton was persuaded by Robert Rubin and others that the deficits he inherited required him to abandon any extension of the welfare state, lest interest rates go through the roof and the economy into the tank. He was urged to balance the budget, which he did, prompting James Carville to quip: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Of course, we still have a bond market, but the fiscal hawks don't talk much about it these days. That's because despite all the borrowing, interest rates remain low. So instead, fiscal hawks have attempted to outsource their browbeating to the Chinese, often referred to as our "biggest creditor," even though China holds only 22 percent of foreign-held US Treasury securities. (The majority is held domestically.) In June Illinois Republican Mark Kirk bragged during a talk at the Center for Strategic and International Studies that on a recent trip to China he'd told Chinese officials that "the budget numbers that the US government had put forward should not be believed. The Congress is actually gonna spend quite a bit more than what's in the budget, and the healthcare bill probably being the lead driver of additional spending by the Congress." This bizarre bit of self-sabotage makes sense only if you recognize that Kirk is hoping that panicking the Chinese will boomerang back to the States and whack Obama's domestic agenda.

My feeling is that, as with "the bond market" in the early '90s, we have to consider the way foreign creditors perceive our fiscal policies,  particularly the Chinese. But that's not the same as saying that our priority in making fiscal policy should be to appease the Chinese. Or that we should treat China as some sort of trump card in domestic political debates. It would, of course, be nuts to start reducing the short-term deficit with 10 percent unemployment simply because the "pain caucus," as Hayes dubs them, says we need establish some credibility with China. The irony is that, as I understand it, even the Chinese leadership doesn't want us to do that. (They'd like to see a strong recovery, too. Though they'd like us to rein in the long-term deficit--by, say, cutting health care costs.)