Why China Is Worried About U.S. Debt

Online, November 7, 2010 (Newswire.com) - In his recent blogs, financial advisor Dennis Tubbergen has given readers some insight into how the Federal Reserve works with the U.S. government to try to steer our economy in more favorable economic directions. Tubbergen has also explained how increasing interest rates now by the Fed could be damaging to the national budget and cause our creditors to reduce and possibly cut our country off from credit. But in a typical 'Catch 21,' out-of-control government spending could easily lead to higher interest rates.

"The problem outlined here has not gone unnoticed around the world," warns Tubbergen. "China has publicly stated that they're concerned."

Why should we care what China thinks?

In a September 28, 2010 Bloomberg Businessweek online post, the article states that China is the biggest foreign investor in U.S. government bonds. According to the Treasury Department, China reduced its U.S. bond holdings by nearly 10 percent in the 12-month period ending in July to about $846.7 billion.

"China and other U.S. creditors are concerned about the long-term stability and the monetization of the U.S. dollar," explains Tubbergen. "Monetization is essentially the printing of money to pay debt. If the government controlled the presses that print U.S. currency, it could monetize the money supply - or just print money to carry out programs since that would be easier than raising or creating taxes, which are highly unpopular."

Contrary to what many individuals believe, the Federal Reserve controls the printing presses, not the government.

"Since the Federal Reserve, or central bank, is independent, it is the job of the Fed to be the custodian of the money supply and manage it in such a manner as to ensure the folks using the money don't lose confidence in it," notes Tubbergen. "This central bank independence is designed to eliminate the possibility of monetizing the money supply. At least in theory."

But with the magnitude of our deficits and the size of China's holdings in the U.S. Dollar, Tubbergen believes something doesn't add up. He states if no one will buy U.S. debt, we will have to either quit spending money we don't have, or print more money (monetize) in order to continue to operate.

"Should we choose the second option, don't we risk alienating those who already own our debt by causing our currency to be worth less when compared to other currencies?" asks Tubbergen, who believes there is some evidence we are beginning to monetize our debt. "Essentially, that's what China is concerned about."

For more information on Dennis Tubbergen's views, visit www.dennistubbergen.com.

Mr. Tubbergen is CEO of USA Wealth Management, LLC, a federally registered investment advisory company. The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.