The NYT decided to hype the story of China as lender to the U.S. government and told readers that China is going to monitor the government's fiscal situation. It quoted a nameless U.S. government official engaged in talks with the nameless Chinese officials: "they wanted to know, in painstaking detail, how the health care plan would affect the deficit," explaining that: "Chinese officials expect that they will help finance whatever [health care plan] Congress and the White House settle on, mostly through buying Treasury debt, and like any banker, they wanted evidence that the United States had a plan to pay them back." If China is concerned about being paid back, then they should be asking first and foremost about the U.S. trade deficit. This will be far more important in determining the value of the dollars that China receives back on the money it lends to the Treasury. If the U.S. government had budget surpluses for decades into the future, but it continued to run trade deficits that were comparable to their pre-recession level (6 percent of GDP), then China would be repaid in dollars that are worth far less than the ones it had lent to the government, since the trade deficit would depress the value of the dollar over time. If China is really concerned about the return on its investment in U.S. Treasury bonds it would be asking about the U.S. trade deficit, not the budget deficit. It would be truly incredible if high level Chinese officials did not recognize this fact. More likely, the nameless U.S. official has an agenda to push to the public and therefore he/she made assertions about the Chinese that may not be true in order to advance this agenda. Good reporters recognize that political figures have agendas and therefore do not always present information accurately. That is why they do not let them speak off the record unless there is a very good reason.
--Dean Baker
