Why China Owns Us

This Week: Why China Owns Us—In More Ways Than One

Understanding the U.S. and China Debt Situation: 101Treasury bills, notes and bonds have long been considered some of the world’s safest investment vehicles. When you buy a Treasury security, you are simply loaning money to the United States government; in return, you receive a guaranteed interest payment. In other words, Treasuries put our government in debt.

In the last year, China has become the biggest holder of U.S. debt, surpassing Japan. China now holds roughly $800 billion in U.S. debt of which we must pay about $50 billion in interest every year. This debt has been sold off by our Treasury Department to pay for Obama’s stimulus package. Trading debt in a global economy is a usual part of business and should cause no alarm. The debt trade plays heavily in how different currencies are valued on a day-to-day basis…but that is a subject for another column. This administration does hope to buy back this debt at some point, but for now, China holds the cards.

However, those cards also dictate another area when it comes to economic issues: the trade of goods between China and the U.S. Follow me here for a second. First off:

—China has recently attached their yuan currency unit to the worth of the U.S. dollar. That is, whatever the dollar is worth in world markets from day to day, the yuan is worth the same amount. Most other currencies, such as the pound or euro, have a floating value of their own, independent of the dollar. Attaching the yuan to the worth of the dollar makes inexpensive goods produced in China appear even cheaper.

Secondly:

—The U.S. will buy goods made in China because they are cheaper, and tariffs on these goods would only worsen the relationship between China and the U.S., thus complicating the debt situation and shutting down our already limited exports to that country.

Last year, "Buy American" clauses were being discussed during the presidential campaign. If we were to simply buy only American goods in the U.S., the backlash from other countries buying goods made in the U.S. would be truly horrific to our economy. (For instance, John Deere sells 80 percent of their product overseas. A "Buy American" clause would arguably shut down that commerce.)

The term trade means what it seems to mean: You give me something in exchange for something of equal value. The world trade stage is indeed a tenuous balance of give and take. President Obama has his work cut out for him when it comes to commerce with China and all of its machinations (human rights being the biggest collateral issue). For now though, trade between China and the U.S. appears to be a lopsided affair.

Previously: The Banker Bonus Debacle