One of the irritating consequences of actually studying history and economics is that the feigned thoughtfulness of familiar talking heads become all but unbearable. Enter one Fareed Zakaria.
Mr. Zakaria, author of The Post-American World, a book “not … about the decline of America, but rather about the rise of everyone else” and host of CNN’s GPS (that’s “Global Public Square”), studied at Yale and Harvard, notably under the famed historian Samuel P. Huntington. He is also the former Editor of Newsweek magazine’s International Edition. With that pedigree and a Ph.D. to boot, one would think Zakaria could render a semi-sophisticated analysis of current events. Which brings us to his article on CNN.com today.
Entitled “China’s not doing us any favors,” it proceeds to explain that the Chinese must continue buying our t-bills in order to keep their currency devalued and fuel their strategy of “export-led growth.” Although Zakaria declines to explain exactly how this works, it’s relatively simple: China buys U.S. debt with new renminbi, keeping their exchange rate artificially low, and thus Chinese goods relatively cheap for American consumers. So far, so good.
What is astoundingly short-sighted is Zakaria’s conclusion, which he makes clear up-front:
The economic situation between China and the U.S. is the financial version of mutually assured destruction – that cold war doctrine of nuclear deterrence. If you destroy me, I will destroy you. [emphasis in original]
While it may be true that China must, in the short term at least, continue to buy U.S. debt to artificially prop up its economy, the long term presents grave problems for the United States. To understand why, one must consider that trajectory of U.S. debt under the Boehner plan, ahem, is headed to $23 trillion (up from approx. $14.5 trillion today) in a mere 10 years – or about 150% of annual GDP. This is simply unsustainable and will almost certainly end in a kind of default. China, meanwhile, by accumulating our bonds, continues to accrue leverage over the United States. Even a threat to drop a significant portion of our debt would have steep implications on the interest rate at which our government currently services its loans. In other words, the Chinese could threaten our ability to borrow by insinuating that we are not credit worthy. Such action may come at an opportune time for the Chinese; say, when they decide that Taiwan really does belong to them.
At that point, although the finances of Beijing may take a hit, it will be America who will face an ultimatum: cut spending drastically (likely ending entitlements as we know them), or massively raise taxes (in effect, socializing the economy and seizing private sector assets). One can speculate based on past events that American leaders will not touch entitlements, but instead choose to curtail our economic liberties even further. China, whose citizens have never known the freedom of Americans, have relatively little to lose. It’s America who stands to lose her heritage from this relationship; the Chinese communist party will endure the suffering of their people as they always do, imprisoning, torturing, and murdering any noisy protesters who may attract international attention. “If you destroy me, I will destroy you.” I answer that while China, if it so desires, can destroy American freedoms, there are no Chinese equivalents for America to threaten; the communist government already owns its citizens lives, cradle to grave.
Zakaria’s analysis fails see past the short term of 5 years. Meanwhile, his CNN viewers (probably not very many) are lulled into thinking that mortgaging America’s future to a hostile foreign government is quite safe, because the Chinese communist economic strategy is to fuel exports by artificially low exchange rates. Other commentators, like Mark Steyn, have focused on the fact that America’s interest payments to China finance the entire Chinese military budget. This is a concrete example demonstrating the unintended consequences of our own government’s profligacy. Yet perhaps more profound is the unspoken diplomatic leverage that China is aggregating, and the existential threat that reckless borrowing poses to the very fabric of our republic.
No analysis is perfect, and human speculation as such is subject to unknowable future events. However, in not mentioning the mid-range consequences of borrowing to his audience, Zakaria has exposed himself as an unserious thinker. Either out of genuine lack of foresight or deliberately ignoring ultimate consequences, he fails to inform his audience of a potentially catastrophic policy of lending away American sovereignty.
P.S. – By no means is Zakaria alone in his superficiality: Paul Krugman, the allegedly intelligent economist who dons a Nobel Prize, told Zakaria on GPS that to fix our economy, we should gear up for an alien invasion. Can’t make this stuff up. We don’t need a false threat of space aliens, but renewed faith in common sense. Borrow less, spend less, produce more. I quote the great George Orwell, who reminded us to first observe the obvious: “To see what is in front of one’s nose needs a constant struggle.”