Who's paying for the bailout?

March 16, 2009
By: Tim Heston

As bad bailout news emerges unabated, we continually hear that finger-wagging phrase that, once uttered, we hope makes these unabashed bankers hang their heads in shame: Taxpayers are shouldering the burden. I've heard the phrase so much that I'm beginning to think we're all serfs toiling in the mud, stopping only to be harassed by the evil tax collector (that is, the government) who snatches what few gold ducats we have managed to scrape together to bail out these Lords of Finance.

China"s premier ruffled feathers last week when, during a news conference, he brought up concerns about his country"s huge stockpile of U.S. Treasurys; China overtook Japan as the U.S. government"s largest foreign creditor. Saturday various news outlets reported Wen saying, We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. I do in fact have some worries.

So how much does the U.S. owe China? Try about $1 trillion.

Responding to this, Obama administration officials said, in ruffled-feathers fashion, that U.S. Treasurys are the world"s best safe haven for those with cash to invest. There"s no safer investment in the world than the United States, spokesperson Robert Gibbs said in a Friday press briefing.

This is an interesting prelude to next month"s G-20 meeting, and it also juxtaposes Treasury Secretary Timothy Geithner"s comment earlier this year about China"s currency manipulation. Merely uttering the phrase rang diplomatic alarm bells around the globe. Those bells go off easily for a reason, because Sino-U.S. relations are muddled and complex. Wen is concerned that U.S. spending may make the dollar fall, which lessens the value of China"s enormous investment. That huge U.S. investment probably puts China in a powerful position when it comes to currency debates.

But with U.S. and European consumer demand down the tubes, so are China"s exports, and the country"s manufacturers are feeling the pinch. Chris Kuehl, managing director of Lawrence, Kan.-based Armada Corporate Intelligence and economist for the Fabricators & Manufacturers Association, International® explained it this way in a newsletter last week: The fall in export demand has provoked some radical restructuring of the manufacturing sector. It has been estimated that China is losing between 500 and 700 factories a week. These are mostly small to medium-sized operations that lived on narrow margins, and as the business of export dried up, they were vulnerable and collapsed quickly. He went on to say that an estimated 25 million to 30 million Chinese have lost their jobs and moved back to the countryside.

Other stats in Kuehl"s newsletter show China"s odd situation. The country that"s been on such a stellar growth pathone that bolted its GDP past Germany to become the third-largest economy in the world, behind the U.S. and Japanhas per-capita GDP numbers behind El Salvador and Albania. Chinese citizens remain, for the most part, poor, and their government has bought more U.S. Treasurys than any other foreign entity.

So who"s really shouldering the burden here? This weekend we learned that AIG executives may be getting millions in bonuses contractually promised to them more than a year ago. AIG is drawing those funds from federal bailout money. That bailout money puts the country into greater debt, funded by (among many other sources) the sale of U.S Treasurys. China, which owns the most Treasurys of any foreign entity, has been buying them with funds coming from years of incredible GDP growthfueled by, among other things, an incredibly huge and cheap labor force.

I"m no macroeconomic specialist by any stretch of the imagination, but in my humble opinion, the world seems to be, technically speaking, out of whack.

Tim Heston

Tim Heston

Senior Editor
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