National Debt When Capitalism Strikes Research Paper

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The continued investment of China in U.S. Treasury notes and bonds, as well as the private investment of Chinese wealth in U.S. businesses, helps to fund government and business activities in the U.S., sustaining both social programs and economic growth in the country. This is an incredibly short-term view of the situation, however, and does not take into account the eventuality of China recalling its debt from the United States when it falls due. When this occurs, the United States could find itself in the very uncomfortable position of owing China far more than it can repay, and even making payments on this debt could severely hamper the United States' ability to carry out many of its operations and social programs, and could also place the country's economy at the mercy of foreign whims.

Despite assurances that it will continue to invest in U.S. bonds and securities, China has also indicated that it has concerns regarding the rising amount of U.S. foreign debt and its financial stability (Barkley & Solomon 2009). If these concerns become large enough, China might begin to call in more of its debt in an attempt to obtain what it can from what it may view as a poor long-term investment (Barkley & Solomon 2009). When this happens, the economic outlook for the United States in the long-term will take a sudden downturn, and this could have a major impact on the global economy due to the United States' position within it.

The problem is essentially twofold: first, the massive amount of Chinese-held U.S. debt -- which is still unknown -- gives China a large amount of power in controlling the economic (and thus the political and social) future of the United States, especially in times of economic instability or uncertainty centering on fiscal policy and position within the United States; second, the vast amount of Chinese-held debt is one of the reasons behind the current uncertainty in the United States' financial position.

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The second issue effectively accentuates and exacerbates the first, leading to an especially tenuous situation that is in large part out of the United States' hands. For now, China must continue to utilize U.S. debt as a means of establishing fiscal reserves, as it is one of the few markets large enough to be of real value to the immense and ever-growing buying power of the Chinese government, but if (or when) this situation changes there is likely to be a major economic shift in the world that will not happen very smoothly or especially quickly (Xin 2009).

Conclusion

Economic tides are always in a state of constant shifting; it is not conceivable that the United States would be able to retain the global economic dominance it has enjoyed in perpetuity. Yet the current situation of foreign debt, particularly to China, creates a situation that is more unstable and uncertain than is necessary. Addressing this issue through a reduction of foreign debt and limiting foreign investment in U.S. treasuries and securities would enable a smoother turning of the tide......

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