G-2: US deficit worries Beijing more than Washington

US-China Strategic and Economic Dialogue.  Source: Google Images

In the first official meeting of the US-China Strategic and Economic Dialogue this week, which puts the Democratic stamp on the brainchild of Hank Paulson, Bush’s Treasury Secretary, Chinese Finance Minister Xie Xuren called on the U.S. to reduce its widening fiscal deficit.  In response, U.S. Treasury Secretary Geithner assured the Chinese that, once growth resumed, the Obama administration would do just that.  See today’s NYTimes article on the subject.  Yet a recent Economist article emphasizes the inconsistency of this goal with Obama’s laser focus on health care reform, which many believe will not be deficit-neutral.  The Chinese worry about the value of their massive holdings of U.S. treasuries (appx. $1.5 trillion).  Fiscal profligacy would mean dollar weakness.  One wonders why in the middle of a financial crisis, U.S. lawmakers feel that universal health care is so important, so much so that they are willing to risk U.S. sovereign creditworthiness.  Obamanomics is like Reaganomics in reverse.  Reaganomics argued that tax cuts and massive defense spending hikes would ultimately lead to higher revenues and a balanced budget.  Not very likely.  Obamanomics argues that fiscal stimulus and health care reform that reduces costs will yield more robust GDP growth and therefore room to cut deficits over the medium term.  Wishful thinking.  I guess Democrats understand that their massive legislative majorities will not continue forever, so they had better get their pet projects done now or never (including getting Judge Sotomayor confirmed).  Hopefully, America’s standing in the world, and therefore the value of China’s foreign exchange reserves,  will not suffer as a result.

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