June 8th, 2011 –

An unlikely party has waded into the U.S. national debt debate, China.  In an unexpected warning, China’s Li Daokui warned congressional Republicans to stop playing politics with the debt and raise the debt ceiling.  But why does China care about the U.S. Debt?

China is currently the world’s largest holder of U.S. National debt, exceeding 1 trillion dollars as of March 2011.  It warned congressional Republicans that they are playing with fire by failing to raise the debt ceiling which the United States uses to cap its borrowing and stoked new fears the U.S. will default on its debt payments.  China owns debts ranging from treasury bills to mortgages, credit cards, and government bonds.  Currently, the United States borrows 0.60 cents for every dollar it spends to make up for the shortfall in income tax revenue.

Republicans are demanding massive spending cuts before they agree to raise the nation’s debt ceiling. Many agree that these cuts are needed but feel they should not be put in place all at once, arguing it would create a severe strain on the poor and middle class of America.  Republicans have proposed cuts in defense spending, medicare, Medicaid, education, environmental waste clean up, emissions monitoring, health care, and many other domestic programs.

If the nation defaults on its debt, interest rates will rise sharply on everything from home loans, credit cards, car loans, student loans, and commercial loans.  The economic theory is that if prices rise, our economy will falter, and businesses will no longer be able to get affordable loans to grow and expand.  A default will also raise the rate which the government will have to pay to sell bonds or obtain new loans thereby increasing our debt even higher.

In the event of a default, China could recall it’s bond holdings, forcing the U.S. government to pay out all at once hundreds of billions of dollars it does not have.

Republicans have said the nation can no longer afford to live in a debt budget and must get its spending immediately under control or else face even more significant problems later.  The debt ceiling has been raised regularly over the last 15 years.  They say failing to act now to cut spending drastically only prolongs the inevitable pain to come to millions of Americans and small businesses.

Democrats agree on the need to tame the budget but disagree on how much and which areas to cut, saying it will cause uncountable hardships on the very people needed to spend to bring the economy out of a recession and restore it to good health.  Democrats also say there must be a tax increase, that the nation’s debt can not be solved by further spending cuts alone.  Democrats want to increase taxes by closing loopholes while Republicans demand steep spending cuts leaving loopholes for corporations and wealthy individuals.

What is known is that China buys more U.S. debt than any other nation, and has a need to keep the U.S. economy healthy and active.  It has become a de-facto interested party to the debt debate.

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