Does federal deficit spending make dollar assets risky?
*AP, by Martin Crustinger, July 28, 2009
“China, worried about its huge investments in the United States, quizzed administration officials about America’s soaring budget deficits while the Obama administration pressed China on the need to rebalance its economy to focus more on domestic-led growth rather than relying on exports to the United States.
Officials from both nations played down the prospects for any breakthroughs this week on the major issues that separate the two nations, including America’s massive trade deficit with China. Critics have blamed the trade deficit over the years for the loss of millions of U.S. manufacturing jobs.
President Barack Obama opened Monday’s discussions by declaring that the United States sought a new era of ‘cooperation, not confrontation’ with China and that management of the U.S.-China relationship would be a major factor in defining the history of the 21st century.
Obama dispatched his top economic officials — Geithner, National Economic Council Director Lawrence Summers, White House budget director Peter Orszag and Federal Reserve Chairman Ben Bernanke — to try to reassure China that the U.S. will not let deficits or inflation jeopardize the value of Chinese investments.
U.S. briefers said the president’s team told the Chinese that the United States was committed to making sure the economic and monetary stimulus being used to fight the recession did not fuel inflation.
U.S. officials told reporters that the American side stressed to the Chinese that the United States has a plan to bring the deficit down once the economic crisis has been resolved. They said Bernanke discussed the Fed’s exit strategy from the central bank’s current period of extraordinary monetary easing, emphasizing that the Fed was being careful to guard against future inflation.
The Chinese, who have the largest foreign holdings of U.S. Treasury debt at $801.5 billion, have been expressing worries that soaring deficits could spark inflation or a sudden drop in the value of the dollar, thus jeopardizing their investments. Chinese officials said those concerns were raised during Monday’s talks.
‘We sincerely hope the U.S. fiscal deficit will be reduced, year after year,’ Assistant Finance Minister Zhu Guangyao told reporters after the Monday talks had ended.
‘The Chinese government is a responsible government and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets,’ Zhu said, speaking through an interpreter.”
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