Data released on July 16, 2014, show that the Chinese government has been buying American bonds at the fastest rate since record keeping began 30 years ago. This explains why bonds have been rallying all year, (as of August 8, 2014) bond yields had fallen to 2.42% on a 10 year bond from 3% at the end of 2013. While the yields have been falling on bonds, prices have been going up. Through the first 5 months of 2014, China had gained more than $107 BILLION in treasury holdings (according to U.S. government data). China controls roughly $1.27 trillion of America’s debt, and about 10.6% of the U.S. treasury market.
China has tens of thousands of people whose only job is to spy on Chinese citizens (granted America has a similar system with the NSA). If a Chinese citizen says anything bad about the government they will be arrested and found guilty (99 % of trials end in a guilty verdict). According to The Economist, if a Chinese official is being charged with corruption, his family will receive benefits if the official were to pass away. This has led to an increase in official deaths in China, where the official reason for death is usually depression. The government has banned all media investigations that might expose the truth behind these suicides. This is the real Chinese state.
So what? What does this mean? Put simply, it is a recipe for disaster. America is being bought out by a state capitalist nation. Granted, China has drifted away from total communism, but it is still an oppressive state. What will happen when China calls in their debt? America obviously lacks the money to pay the massive debt (see my article on how to cut spending: eaglerising.com/6938/fixing-americas-financial-crisis/) and would face certain default. What would happen if America defaulted? In a simple term: hell on earth. All the nations in the world would lose faith in America and her currency. The prices of goods would soar and it could cost more than $200 just to fill up your car with petrol (I will use the term petrol to avoid confusion with natural gas). There would be another housing market crash. People would lose equity and it would be all but impossible to get a mortgage.
America would be left with no choice but to request a loan from the IMF or World Bank. A loan from either entity would come with a stipulation for severe austerity. A truly severe spending cut would have to happen (worse than the cuts I proposed in the previously mentioned article) in order to save the country. Riots would probably break out nationwide, as we are seeing in Greece. We would be facing a Second Great Depression, making us just like post WW1 Germany.
We cannot allow our debt to continue to grow as it has, especially if China continues to purchase more and more debt. If our debt continues to grow and we do in fact default, Chinese influence would become rampant in America and we would become a New China. It will hurt to cut America’s debt now, but it will hurt a lot less now than it would after a default.
Note: Post-default scenario is all speculation by myself, I am not saying this is what would happen, I simply see it as a likely scenario
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