Gen. Tso’s Default Chicken
By DAVID E. SANGER
FINALLY President Obama and Congressional leaders began engaging in serious discussions last week over the trillions in cuts it would take for a deal to raise the debt ceiling before the default deadline of Aug. 2.
But the most important meetings on the subject may be sessions President Obama is not holding — at least not yet — with America’s lenders, starting with residents of Zhongnanhai, the tranquil-looking leadership compound next door to the Forbidden City in Beijing. It would not be politically wise for either Democrats or Republicans to suggest that the Chinese have any voice in how deeply Medicaid or Social Security is cut, or whether taxes should be raised on wealthier Americans.
But one senior American Treasury official noted the other evening, as his colleagues engaged in their giant game of default chicken, that sooner or later whatever agreement goes through the House and the Senate will have to pass muster, at least informally, in the Great Hall of the People. “You know how the generals always say that when it comes to our strategy in Afghanistan, the enemy has a vote?” he asked. “Well, when it comes to borrowing a few trillion dollars, the Chinese have a vote, too.”
The nature of that Chinese vote is frequently mischaracterized. It’s not as if the Chinese are about to sell the several trillion dollars in United States Treasury bills they already hold; the last thing they want to do is devalue one of their own biggest assets. But in ways that were inconceivable just a few years ago, the Chinese have used both formal and informal meetings with their American counterparts to explore whether America’s plan for reducing its debt is credible — and to remind American officials that they have options to gradually shift their money, say, to oil wells in Africa or real estate in the Middle East.
Two years ago, at the first big annual “strategic and economic review” between the Obama team and Chinese officials, the Chinese asked Peter Orszag, then the head of the Office of Management and Budget, to explain in agonizing detail how the administration planned to pay for its health-care overhaul. The Chinese were not particularly interested in whether Americans used a single-payer option or insured children around the land; they wanted to know how it would affect the deficit.
Subsequent sessions have not been as specific. But the Chinese have hinted that if Americans think they can borrow forever without paying higher interest rates, they should think again.
Much of this is chest-pounding, of course. The Chinese see a moment of strategic advantage as America devolves into a hard-to-comprehend debate about whether its Congress will authorize paying back money it has already borrowed and spent. Most countries, one senior Chinese financial official noted with a touch of sarcasm, think about how much they want to pay back before they borrow, not after. (Perhaps that explains why the concept of a “debt limit” is a purely American invention.)
Robert D. Hormats, a former top executive at Goldman Sachs, and now under secretary of state for economic affairs, notes a deeper paradox: America’s message to the Chinese, and other Asian partners, may cut down on how much America can borrow. Its message to surplus countries like China is, “You should consume more and save less,” he said. If they listen, “there will be fewer funds available to buy bonds and other assets here.”
In fact, the Chinese are coming to that conclusion all by themselves. Though the country is experiencing a construction boom at home, many of their cities and towns are deeply in debt, and may need bailouts. Same for the banks in an overheated Chinese property market.
All this is making the Chinese a bit more cautious. Barry Eichengreen, an economist at the University of California, Berkeley, said, “The Chinese are understandably anxious about having so many eggs in one currency basket” — meaning dollar-denominated assets. “They don’t need all those dollars to control their exchange rates,” he said (but they need some to manipulate rates enough to keep their exports cheap).
The good news is that even for the Chinese, the United States is a more attractive place to park surpluses than Greece-obsessed Europe or a tsunami-racked, politically paralyzed Japan.
But as the United States heads into one of its periodic flirtations with isolationism — to bring home the troops and batten down the hatches — it is worth remembering that whatever spending-and-revenue plan emerges must pass an unspoken credibility test abroad.
No lender, not even the mandarins of Zhongnanhai, can dictate how much America spends. But they can influence how much America will have to pay to borrow the cash — and that is the giant, unpredictable variable in whether Americans can bring a record debt load under control.
David Sanger is the chief Washington correspondent of The New York Times.