U.S. Borrows Itself Into a Corner

In the latest signal of pressure on the dollar’s role as the global reserve currency, Communist China is urging the nation’s banks to scale back their holdings of American Treasury debt. The move underscores a risk posed by America’s status as the world’s largest borrower nation, with the national debt hurtling toward $39 trillion. If our global rivals sour on Treasury debt, that could lead to higher interest rates and economic trouble for America.A Yale economist, Stephen Roach, has called this potential demarche by China a “nuclear option.” He warns that if the mandarins at Beijing go on what he calls a “buyer’s strike” at Treasury auctions or “start to unload” China’s “outsize position as America’s second-largest foreign creditor,” the consequences could be dire. It would, say, “unleash havoc” in bond markets, Mr. Roach says, and “be devastating for America’s deficit-prone economy.”To be sure, there are hazards for China, too, if Beijing pursues such a course — in part by potentially diminishing the value of the American debt retained by the mandarins. Hong Kong and the Mainland hold, as of November, some $938 billion in Treasury debt, the Treasury Department reports. Yet regulators in China are advising “financial institutions to rein in their holdings of US Treasuries,” Bloomberg reports, citing unnamed sources.The Chinese government points to “concerns over concentration risks and market volatility,” Bloomberg adds, with banks urged “to limit purchases of US government bonds” while “those with high exposure” are asked “to pare down their positions.” The directive, Bloomberg says, applies to private bank-held, as opposed to state-owned, Treasury debt and comes amid “debate over the safe haven status of US debt and the appeal of the dollar.”And while China is trying to downplay this move as a matter of “diversifying market risk” as opposed to “geopolitical maneuvering” or any “loss of confidence in US creditworthiness,” it’s hard to avoid those very concerns. That’s especially true in light of the trend traced in these columns of global central banks “quiet-quitting” the dollar and instead bolstering their holdings to the historic basis of monetary value, gold.The rising profile of gold, and the deepening doubts over the dollar, suggest why some critics, like monetary sage James Grant, describe the greenback’s reserve status a “poisoned chalice.” A reserve fiat currency — no longer convertible into gold at a rate set by law — has let America rack up an enormous debt, and consume more than our economy produces, helping contribute to the dollar’s plunging value. A dollar today is worth less than a 5,000th of a gold ounce.America’s surging debt is a symptom of the fiat money era that opened with the closing of the gold window under Bretton Woods. As recently as 1971, before Nixon abrogated America’s obligation to foreign governments to convert the dollar into gold, the greenback fetched a 35th of an ounce. At that time, America’s debt held abroad amounted to 3.5 percent of gross domestic product, the St. Louis Fed reports. That level has soared to 30 percent.The plunging gold value of the greenback is the lens through which to view foreign nations starting to look askance at their holdings of America’s dollar-denominated debt. It suggests the danger in which America has placed itself by allowing its debt to soar and its currency’s value to collapse. China’s maneuvering against Treasury debt reflects the potential downside of mortgaging America’s future to our global adversaries.

U.S. Borrows Itself Into a Corner

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