China's milestone, our millstone

This opinon article from today's New York Times expresses exactly what I've been saying. And regarding the last sentence, since when has Bush told the truth about anything.

The Chinese sell a lot of merchandise in the United States and, in the process, accumulate a lot of dollars. They then loan many of those dollars back to the United States in exchange for all manner of American i.o.u.’s, including Treasury bonds, federal agency bonds, and private-sector debt.

America’s indebtedness to China, as a result, is staggeringly high, although the Bush administration — which needs foreign loans to help finance the budget deficit — seems unfazed. But there is reason for pause. The Wall Street Journal reported this week that China’s holdings of foreign currency and securities would soon top $1 trillion, a fivefold increase since 2000. Roughly 70 percent of that is believed to be in dollars or dollar-based assets.

Of course, $1 trillion does not confer significantly more clout than, say, $990 billion. But the size and growth of China’s holdings mean increasing vulnerability for the United States.

For several years, China’s loans have helped to keep prices and interest rates low in the United States, and to finance big tax cuts. If the lending began to dry up — because Chinese officials decided to diversify into other currencies or to spend more at home — prices, interest rates and taxes in the United States would very likely rise. If the loans dried up quickly — a worst-case scenario — the result could be a sharp financial crisis. A gradual shift could mean a long downward trend in American living standards as a higher cost of living took its toll.

China might never pull back in a way that harmed the United States. But the fact that it could already makes the global financial system more volatile. Investors and traders are hypersensitive to any hint that Beijing may switch allocations.

The Journal also reported that administration officials are concerned that developing nations, unhappy with conditions on loans from the International Monetary Fund, may decide to borrow directly from China. That would give Beijing more influence over emerging markets and their governments.

To its credit, the Bush administration has repeatedly stressed that the rise of China is not to be feared or begrudged. But excessive borrowing during the Bush years has made the United States unnecessarily vulnerable.