Chinese officials say US government spends to much money and is the overall problem

If you listen to Treasury Secretary Timothy Geithner and the rest of Obama administration, failure to raise the debt ceiling by Aug. 2 risks “catastrophic economic and market consequences of a default crisis.”

Funny, the Chinese government — holder of $1.1 trillion in U.S. government debt — doesn’t seem to think so. I recently returned from a fact-finding mission to the Middle Kingdom. And my big takeaway is that Beijing isn’t too bothered by the Washington back-and-forth over raising the debt ceiling — provided the result is a long-term budget fix. For that, even a delayed interest payment might be acceptable. But brinkmanship in Congress that only punts the issue, and shirks from meaningful reform, would quickly turn investors in Beijing and elsewhere off.

When asked about government reaction to a temporary stoppage of debt payments on those holdings, a respected top official with an influential government advisory group reminded that investment represents “patient capital.” If a delay in Washington facilitated deep spending cuts, Beijing would grudgingly accept it.

Not that Beijing would be thrilled about it. Chinese officials are concerned about the reaction from a nationalistic public that already thinks America is too quick to blame China for its economic woes. To avoid a subsequent worsening of already fragile relations with Washington, then, Beijing would need to persuasively argue that it gained something in exchange for its forbearance. So the worst-case scenario is a delay that only results in a temporary hike in the debt limit.

But then again, I don’t believe Geithner’s deadline. As analyst Dan Clifton of Strategas notes:

Treasury is not restricted from prioritizing interest payments over other expenditures, and revenues are coming in at 10 times the rate of interest payments. Moreover, cash flow is so strong that prioritizing interest payments over other expenditures will not jeopardize Social Security payments. As such, we expect continued interest payments but a semi-government shutdown to occur which would delay long term spending projects and aid to state and local governments until an agreement could be reached. The net effect of this is that investors should be focused more on the economic implications of a semi-government shutdown than the potential for a US default.

So my advice to the spending hawks on Capitol Hill — of both parties — is to listen to China, stand firm and get something big in return for raising the debt limit. At minimum this would be getting at least $1 in spending cuts for every $1 increase in the debt ceiling, along with the spending caps found in the McCaskill-Corker bill. Even former Clinton economist Alice Rivlin thinks raising the debt ceiling should be linked to a long-term budget plan.

The debt ceiling provides an opportunity for real fiscal reform, one that shouldn’t be wasted.

http://blogs.reuters.com/james-pethokoukis/2011/06/06/china-to-us-forget-debt-ceiling-cut-spending/