"The pen is mightier than the sword." For nearly a decade, Brahm has used newspaper articles, magazines and authored over 20 books to explain current affairs, reshape stalled negotiations, and provide a communication platform to Asian leaders and policymakers. His writings reveal underlying central challenges facing Asia over the past decades.

The Debt Trap

Written by Laurence Brahm - Published by South China Morning Post on 11/04/2008

In the 18th century, the Chinese market remained a mystery for Britain, which was dependent on imports of Chinese tea, silk, textiles and porcelain. China’s demand for payment in gold bullion and silver sucked Britain’s reserves dry.

The British tried everything to reverse the trade imbalance. Experiments in new trade instruments ensued. Knives and forks were exported to China in the hope that every Chinese would abandon chopsticks. But it didn’t work. Piano exports also failed; nobody wanted to play them.

Finally, the British found a commodity that worked – opium. After a war to open China’s trading ports, the addiction worked. The trade deficit began to reverse, and Britain’s silver reserves once again grew. Is something similar happening today?

China’s media reported during last month’s Group of 20 meeting that America’s assistant trade representative had stated that “China is America’s bank” – a profound thought.

Certainly, there has been little substantive progress following congressional approval of America’s US$700 billion bailout plan. America is technically bankrupt as a country and has no cash. It can issue more Treasury bonds, but it needs a buyer. Large European economies such as Germany, France, Britain and Spain have all come out with their own bailout plans for their financial institutions.

Total commitments from European countries amount to some US$2 trillion, to be financed almost entirely by new bond issues. Add America’s bailout package and assorted debt issues, and the total amount of the black hole for sale is US$3.4 trillion. But who wants to buy it?

America’s great circus promoter P. T. Barnum once said: “There is a sucker born every minute.” This was the underlying assumption of the post-Bretton-Woods financial order – that there would always be somebody more stupid than you to buy your debt for a higher price.

China sits on US$1.9 trillion worth of foreign exchange reserves. Add corporate bonds and US dollar assets, and it is currently holding over US$1 trillion in US dollar assets.

US Treasury Secretary Henry Paulson has been pushing China to purchase America’s debt.

Meanwhile, China’s inner financial circles have joined the debate. One faction says they should refuse to purchase American debt. The other faction says that China has no other choice.

The first faction claims that this is the Opium wars all over again. America is effectively exporting its crisis to other countries. America remains rich in resources and has assets throughout the world, they argue. It could withdraw all its global military bases and save money, and itself.

The other faction believes that, if China doesn’t purchase this debt, it will follow the US into collapse. Without America’s avaricious consumer market to sell to, China’s exports will have no outlet, its factories will close and its intrinsically violent workers will go back onto the streets. Despite the debt trap, China has no choice but to bail out America and, in turn, become part of its debt.

Popular opinion holds that China’s bailout of America should come with conditions for Washington, such as reducing its military expenditure, withdrawing its troops from Iraq and Afghanistan, and on the sale of sophisticated military equipment.

However, this is unlikely. At the end of July, China held US$518.7 billion in US Treasury bonds. Of the US$700 billion bailout package, China is already committed to US$200 billion. This will be divided between the State Administration of Foreign Exchange (Safe), the China Investment Corporation and a consortium of big financial institutions. Officials from Safe shake their heads in private, knowing they are buying outright risk. If the US dollar devalues further, China’s entire overseas investment and, more importantly, its precious foreign exchange reserves – for so long its trump card – will shrink. So, what if that disappears? Just remember the Opium wars.

Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.

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