The voice of young liberal democrats


China and Iraq by georgeinwashington
April 15, 2007, 3:17 pm
Filed under: Foreign Affairs, Iraq

If you follow the money financing the Iraq war, much of it originates in Beijing. However this is not a consequence of any complicity of the Chinese Government, but rather a byproduct of the current global economy. All the same time this leaves a surprisingly large amount of control of US policy in Chinese hands and in looking towards the end of US involvement in Iraq, we may be better off to look at the actions of China rather than developments in Washington. To explain why this is so we first need to take a look at how the US is financing its actions in Iraq.

When governments spend more than they can earn back in taxes they have to borrow the rest by issuing debt. This debt in the US comes in the form of US Treasury bonds. The latest estimates of the Congressional Budget Office are that the US Government will spend 260 billion dollars more than it earns this year. Most of this deficit is accounted for by spending on the Iraq War which recently reached 100 billion dollars a year. We know that the war is being debt financed because most of the spending comes from emergency appropriations, when the Department of Defense asks for money from Congress outside of the usual budget procedure.

At the same time the US currently has a huge trade deficit with China. This deficit is so large that container ships often come back empty from the US on their return journey to China. Currently China sells around 100 billion dollars more goods and services to the US than the US sells to it in return, and this difference is made up for in US dollars.

The Chinese have to do something with all of their accumulated dollars. And a large proportion of them go into buying US Treasury bonds. The Chinese now hold an incredibly large share of the US public debt with almost half of all US Treasury bonds being owned in Asia. This recycles the dollars that China receives back into the US economy, more specifically into the hands of the US Government. Furthermore this willingness on the part of the Chinese to buy T-bonds keeps debt cheap for the US Government.

Now suppose for a moment that China stopped buying US Treasury bonds. This would certainly not be implausible. The Chinese central bank has often talked about diversifying its foreign currency holdings into Euros and other currencies. With the absence of an important buyer of its debt, the US would either have to raise interest rates, raise taxes or cut spending. An increase in the interest rate would raise the return on bonds, making them more attractive to other potential buyers; raising taxes or cutting spending on the other hand means that less has to be borrowed.

As the US already faces a huge burden of repayment on its existing debt, and many predict a slowdown in the US economy this year, raising interest rates may not be possible. If taxes are increased, the public will inevitably start to ask questions as to why they are being expected to hand over their money to the Federal Government, and they might not like the answer. If this Government went to the American people to ask them for more money to fight the Iraq war, there is little chance that they would be willing to pay. A swift pull out from Iraq that would drastically cut US Government spending and with it the budget deficit, might be the only option left.

In Europe we often see Americans’ fear of the state and aversion to taxation with some perplexity. However in a state such as the US, which only provides for the most basic levels of public service, the majority of the government’s activities are necessarily occupied by defence. Americans know this and for them, like the British liberals of the eighteenth century, low taxation is seen as a means of keeping a violent state in check, making sure that if wars have to be fought then approval has to be sought from the purse of the public. However now it seems as though the large capacities of governments to run such deficits has long since made this check on government power obsolete. Now the power to dictate policy to the government lies not in its constituency but in the hands of its financierfor the US Government trying to pay for a war in Iraq, its financiers are in Beijing.

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4 Comments so far
Leave a comment

I see low tax in the UK as a means to keep the coercive state at bay. In the UK we’ve been sucked into complacency about that state. We’re now starting to see the effects of this with the world’s largest DNA database and an ever intrusive state.

Comment by Tristan Mills

The author has an incredible insight when analyzing US finance situation and deriving connections between China and IRAQ war; however, real statistics will tell in a more convinced way.
Paying a visit to US department of treasury website: http://www.treasury.gov/tic/mfh.txt, all the major boss of US government is listed: with Japan being the biggest (larger than 2nd and 3rd together), China second, and UK third (not bad!). If we’re following the logic, it’s more appropriate to change the title of the article to be “JAPAN AND IRAQ”.
I totally agree with that “this is not a consequence of any complicity of the Chinese Government, but rather a byproduct of the current global economy”. Since it’s a byproduct of global economy, I don’t find it any sense to impose a delicate connection between China and Iraq War, but rather the US government itself who should be blamed. If US government doesn’t want to involve in Iraq, that’s it, there’ll be no war. And I don’t think US government is that stupid to fight a war in Iraq just because others like Japan, China or UK paid him to do so and eventually lose control to foreign governments.

Comment by eric

The link to US department of treasury
is here:
http://www.treasury.gov/tic/mfh.txt

Please delete the comma behind.

Comment by eric

But while Japan’s holdings of US securities has decreased somewhat over the last three years, China’s holdings have just about doubled. Here’s the historical data, from the same source:

http://www.treasury.gov/tic/mfhhis01.txt

Comment by Dave




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