The Working File

The Chinese government had an interesting exchange with our President this week about US debt. John Hinderaker summarized it:

Of course, what the Chinese are worried about is not that the United States government will default on its bonds. That obviously won’t happen. The Chinese concern, now being expressed openly for the first time, is that the U.S. will adopt the standard debtor’s remedy of inflating its currency and paying back its debts in shrunken dollars. Why are the Chinese worried about this? Because Barack Obama’s budget proposes to borrow trillions of dollars, injecting them into the U.S. economy without any offsetting wealth being created. The inevitable result, as any economist not in the pay of the Obama administration or the Democratic Party will tell you, is inflation.

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With their shot over the bow, I think the Chinese are telling Obama that they don’t like his budget. It is obvious to them that it will cause inflation, even if Obama himself doesn’t understand the problem. Thus, I think they are telling Obama that they are willing to lend our government more money only if 1) the Obama administration follows a more responsible fiscal policy, and 2) in any event, they will insist on higher interest rates in the future to compensate themselves for the risk of inflation. I assume Obama will have to go along, since there seems no prospect of a Plan B.

How ironic: we American conservatives may well be in the position of hoping the “Communist” Chinese can impose fiscal discipline on our shamefully incompetent government.

Power Line – Barack and Beijing.

Since Obama announced his budget priorities in early February or so, I’ve been very worried about inflation myself. I’m stocking up heavily on I-bonds and TIPS as a result, although I worry that somehow the government will simply walk away from the inflation protected aspect of those securities also, either by revising the method by which inflation is measured or some other vehicle.