Friday, August 24, 2007

China is Holding Bush by the Short and Curlies

The Globe and Mail reports today that Chinese state-owned banks “admit they’re on the hook for $11B” of the subprime debt paper. This crap debt is causing a credit crunch all over the world and I am sure the Chinese are not amused. The impact of the Chinese banking is not huge but if they pull out of the U.S. debt market, that will be a disaster for the American economy...and it will not stop there.

The impact of the American subprime mortgage market meltdown is getting wider and deeper and more global every day. This is not going away and the stock market volatility of the past week or so has been dampened by some pretty hefty cash interventions by national central banks everywhere trying to maintain liquidity. But this mess is far from over. In fact we have only just begun.
A scan of headlines in the financial pages tells us the worst is yet to come. One can all most see this as a fiscal tsunami rising on the horizon and heading towards us. Right now it is far enough in the distance we can’t really tell how big it is or how fast it is moving - but we can see it coming.

Here is a taste of what is gong on form the MSM newspapers:
“U.S. home foreclosures soar in July…fallout from subprime crisis seen as a major factor behind 93% jump in default.” Estimates are that the US will see over 2million residential foreclosures in 2007 and 43 States are all ready seeing a 2007 increase over 2006 figures.

“Finance jobs face the axe as housing woes deepen” U.S. financial services industry has 87,962 job cuts so far in 2007 while all of 2006 saw 50,327 financial sector job cuts. U.S. real estate and construction job cuts in the first 7 months of 2007 are 21,620, more than double the cuts in all of 2006.

On the investment side it is not any better and it has infected Canada too where estimates indicate we are holding over $33B of this non-liquid paper. The Financial Post reports that the Ontario government is in for $700 million, Air Canada is holding some $37million and, the Greater Toronto Airport Authority is exposed for about $250million. Even the venerable and huge Ontario Teachers’ Pension Plan is in for $60million.

Reports in the U.S. stock market that “confidence is shaky” and some American financial experts are indicating a recession is on the way because the recent buoyant economy has been lead by consumer spending financed by loans against increasing home equity. With housing prices dropping and the increasing foreclosures the consumer psychology changes and they quite spending causing a recession. The virtuous cycle turns vicious.

Put that in the context of where Dubya has taken the American economy from $236B surplus in 2000 when he became President to a $248B deficit in 2006. 2007 estimates say the 2007 Bush deficit is going to be at least $210B. He has overspent as much as $400B in a single year since becoming President. Total U.S. federal debt is now over $5-trillion with $2.2 trillion if held by foreigners. The Chinese hold about 50% of the foreign owned debt.

Now consider the enormous U.S. trade deficit of $758B in 2006 and we see more American vulnerability. The first half of 2007 saw the Bush Presidency creating a trade deficit with China alone of $118B. Ouch! And the war with Iraq must be costing the Americans a pretty penny too…largely being financed by borrowings from China.

So we can see that China is holding Bush by his short and curlies. They can, at their will, dictate a large portion of future of the U.S. economy just by not lending any more and not rolling over the existing American debt they hold when it mature. It is just a matter of time before we see some enormous changes in the direction of the U.S. economy. It is going to have a global impact…and it is not going to be pretty.
For more insight and commentary on suggestions for a made-in-Alberta foreign policy - check out the Aug 20th Editorial on Policy Channel