China owns America, according to the Tea Party. Although the recent rumor that China possesses a larger percentage of government bonds than the American government itself has been busted, the idea has sparked debate over the future of the global financial market.

China, the 3rd largest country (by landmass) with the second leading economy in the world, does in fact own the largest single share of foreign-owned American Treasury securities (36 percent), some $1.16 trillion. That’s 16 percent of total U.S. debt.

Back in 2006, it was calculated that China added $30 million to its reserves of foreign currencies every hour (Bonner, Bill: “China’s Dollar Reserves, America’s Debt”). China’s pool of reserves had topped $1 trillion, approximately 20 percent of all dollars worldwide. This immense cache is the result of a large current-account surplus, significant inward foreign direct investment, and big inflows of speculative capital.

Though this influx of foreign currency would theoretically have dramatically increased the worth of the Yuan, the Chinese government instead resisted this increase, keeping labor and exports dirt cheap for foreign investors.Thus, China has expressed concern over the security of its vast holdings.

Realistically, any nation should control assets denominated by several currencies, commodities, and direct overseas investments in order to avoid the sharp depreciation of any one type of asset. “We hope the U.S. government concretely takes responsible policy measures to increase the confidence of international financial markets and respects and safeguards investors’ interests,” the State Administration of Foreign Exchange said in a statement.

In an e-mail in August, Yu Yongding, a former advisor to China’s central bank, remarked that the U.S. Treasuries fail to provide safety or liquidity in managing China’s foreign-exchange reserves, worth $2.45 trillion. He went further to say that, in order to help lessen demand for the securities, China needs to curb the growth of its foreign reserves by pulling out of the currency market.

As a result, in the 12 month period ending in July, China has cut its holdings by about to 10 percent to $846.7 billion, according to the U.S. Treasury Department. Additionally, China and Russia came to an agreement in 2010 following the global recession.

In the agreement, they would use their own currencies for bilateral trade rather the commonly used American Dollar and other similar Western currencies. They may not be outright denouncing the dollar in this act, but they are certainly challenging its rule.

Image Courtesy of  http://www.flickr.com/photos/nznationalparty/

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In an interesting turn of events, the Congressional Budget Office rating Senator Harry Reid (D-NV)’s debt ceiling plan. Just one day after the CBO scored Speaker John Boehner’s plan, the non partisan congressional scorekeeper released their findings on Reid’s plan.

On Tuesday, the CBO stated that the Speaker’s plan would save $850 billion over the course of 10 years. Reid’s plan would reduce the deficit by $2.2 trillion over the next decade, the nonpartisan Congressional Budget Office said. The Speaker was already forced to pull his bill over the low score from the CBO and stated that he was going to “rework” it. Reid’s plan also included no tax hikes or increases in revenue, a demand of the Republican Party.

Two major differences account for the conflicting scores. In Reid’s plan, the very expensive wars in Iraq and Afghanistan will completely end. Also, Boehner’s plan only raised the debt ceiling by one trillion dollars and was only trying to find a trillion cuts to match the amount of raising the debt ceiling. Under Reid’s plan, the debt ceiling would be raised until 2013.

Rep. Boehner defends his plan, calling the CBO results “misleading.” Boeher spokesman Michael Steele explained why the report was misleading.

This report shows the Senate plan for what it is: a grab-bag of gimmicks that gives the President a blank check. In contrast to the bill House Republicans have offered, the Senate Democratic bill counts as ‘savings’ a trillion dollars in war money that would never have been spent — and on top of that, slashes the defense budget in a manner that would hurt our men and women in uniform in a time of war.

It relies on smoke and mirrors for half of its ‘savings,’ yet still cuts $500 billion less than promised. In reality, the Reid plan would only save taxpayers about $1 trillion while giving the President the largest debt limit increase in history. Despite previous claims, it significantly falls short of the requirement that we cut more than we increase in the debt limit.

President Obama and other Democrat leaders are supporting Reid’s plan. Reid has hinted that Congress may be working on a compromise. “Magic things can happen here in Congress in a very short period of time under the right circumstances,” said Reid, the Senate majority leader.
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Despite some Democratic leaders prompting, President Barack Obama has stated that he will not utilize the 14^th amendment in order to bypass congress and raise the debt ceiling. The little known 14^th amendment is vaguely worded and legal scholars differ on the whether the amendment would allow the president to continue to borrow or could pose a legal challenge.

On Tuesday, Obama’s spokesman, Jay Carney, seems to dismiss the possibility. “The Constitution makes clear that Congress has the authority, not the president, to borrow money and only Congress can increase the statutory debt ceiling. That is just a reality,” Carney told reporters.

However, House leaders emerged from a caucus on Wednesday and urged Obama to raise the debt ceiling any way possible. If Congress can’t reach a deal on a long-term debt limit increase by Aug. 2, Obama should “sign an executive order invoking the 14th Amendment,” said Assistant Minority Leader James Cyburn (D-S.C.).

“I am convinced that whatever discussions about the legality of that can continue,” Clyburn said. “But I believe that something like this will bring calm to the American people and will bring needed stability to our financial markets.”

House Democratic Caucus Chairman John Larson (D-Conn.) stated that Obama has previously expressed doubts about his legal authority to unilaterally raise the debt limit. But circumstances have changed, Larson said, and “we just want to let him know that his caucus is prepared to stand behind him” if Congress fails to pass a longterm deal.

“We have to have a fail-safe mechanism,” Larson said. “We believe that fail-safe mechanism is the 14th Amendment and the president of the United States.”

Former President Bill Clinton argued last week that the 14th Amendment that states the “validity” of government debt ”shall not be questioned” means that Obama could simply ignore the congressionally imposed debt ceiling and go on borrowing.

A handful of Democrats plan to hold a press conference on Thursday in the capital. The Democrats want to encourage the president to “invoke the 14th Amendment in the absence of a bipartisan agreement to raise the debt ceiling and avoid national default,” according to their press release.

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As the United States is hurling closer to the point of no return on the debt ceiling, President Obama addressed the nation on Monday evening calling the partisan politics a “dangerous game.” Obama criticized the temporary Republicans plan and urged Congress to raise the debt ceiling before the quickly-approaching August 2^nd deadline.

“The American people may have voted for divided government, but they didn’t vote for a dysfunctional government,” the president said in a hastily arranged prime-time speech. He appealed to the public to contact lawmakers and demand “a balanced approach” to reducing federal deficits. “It is a dangerous game we’ve never played before,” Obama said, “and we can’t afford to play it now.”

Obama discussed the importance of raising the debt ceiling and the consequences if the ceiling is not raised in time. “Republican House members have essentially said that the only way they’ll vote to prevent America’s first-ever default is if the rest of us agree to their deep, spending cuts-only approach,” Obama said. “If that happens, and we default, we would not have enough money to pay all of our bills – bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses.”

The president suggested that Republicans consider raising taxes on the wealthiest Americans. He pointed out that it is not fair to ask for average American families to deal with deep spending cuts while the wealthiest Americans get off scot-free. “Most Americans, regardless of political party, don’t understand how we can ask a senior citizen to pay more for her Medicare before we ask corporate jet owners and oil companies to give up tax breaks that other companies don’t get,” the President stated.

“How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries? How can we slash funding for education and clean energy before we ask people like me to give up tax breaks we don’t need and didn’t ask for?”

Arguing that Republican leaders were acting outside of the interests of their constituents, President Obama called on voters to “make your voice heard.”

Speaker of the House John Boehner (R-OH) unveiled a plan earlier on Monday that would raise the debt ceiling temporarily for six months. Obama addressed the plan stating, “In other words, it doesn’t solve the problem,” he said. Speaker Boehner issued his own rebuttal speech immediately following Obama’s address.

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Republican and Democratic lawmakers have been engaged in intensive negotiations for weeks to figure out how to lift the $14.3 trillion debt limit but a devastating default looms as the two parties have yet to reach agreement. President Barack Obama addressed the nation with his frustration over the deadlock: “Once again, the economy will be held captive unless they [Republican lawmakers] get their way. This is no way to run the greatest country on earth.”

“Every day that goes by without a deal will see investors become a bit more defensive,” said Omer Esiner, chief market analyst at Commenwealth Foreign Exchange in Washington to Reuters. The stalemate has shook the American position in global markets and experts say that failure to reduce the government deficit by $4 trillion over the next 10 years will downgrade the United States.

President Obama said in a televised address on Monday “I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress – a compromise I can sign. And I am confident we can reach this compromise.” Leaders of both parties have insisted that they will not allow the United States to default but so far, demands from both sides have been irreconcilable.

Republican lawmakers say the lift of the debt ceiling must be accompanied by even larger reduction in spending, reflecting the Tea Party line to shrink government. Meanwhile, the Democrats want to shield Medicare and Medicaid to secure old and poor Americans — they want any cuts in the healthcare system to be balanced by changes in the U.S. tax code, something that Republicans in the House of Representatives have staunchly refused.

Because of the division between Republican control in the House and Democratic sway over the Senate, it seems unlikely that their competing plans will win bipartisan support by August 2, when the US ‘runs out of cash to pay its bills’.

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