China Worries

Shakespeare warns us, “Neither a borrower nor a lender be”, which seems like good advice. Sadly, like a lot of other good advice, it suffers from difficulties during implementation.

It seems we’ve borrowed – quite a bit.  Even those who haven’t personally borrowed or lent are still under the collective borrowing of our country. Worse still, the people who are lending us the money are starting to get nervous.

As we’ve borrowed, China has lent. Unlike our traditional creditors (the Japanese and oil-rich countries, etc.), the Chinese are new at this game – and they don’t want to lose big their first time out. It shouldn’t be overlooked that they aren’t new at the game, just this game. By that, I mean, that as our politicians daily make fools of themselves and seek political expediency, the Chinese civil service quietly operates with a multi-generational plan, seeking to lay the foundations of a modern Chinese state that will last thousands of years.

These Chinese public servants are not perfect, however. For a few years now, they have been coming to the conclusion that they have made a crucial mistake, and they are seeking to correct it (given enough time). You see, the Chinese invested most of their money in what were the safest possible investments on the entire planet – US Treasuries.

No doubt, the Chinese investments have so far paid off – but they have realized with typical bureaucratic slowness that far too many of their eggs are in the same basket. They have begun to diversify, but they are a long way from being diversified. The Chinese are busy using their money to undertake infrastructure projects on a scale too massive for Western comprehension, in addition to accumulating gold over time. And when the Chinese do something over time, it doesn’t happen very quickly.

But what was it Shakespeare – or at least one of his characters – was really trying to tell us? Let’s examine the more of the famous lines from Hamlet. It is the advice of a father to his son:

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.

The second line explains the dangers in lending. Lenders need to be aware that lending money risks more than money. Often, you end up losing your money, and worse – the friendship of the person to whom you are lending.  In choosing the safest place to save their money – US government debt – the Chinese inadvertently risked further antagonizing the relationship between the two countries.

The Chinese, concerned about their massive quantities of dollars, are asking for a “guarantee” that the United States won’t pursue “reckless policies”. Well, I’m hoping the same thing, but I don’t think it’s going to help me or the Chinese very much – guarantee or not!

The third quoted line is a caution to borrowers: And borrowing dulls the edge of husbandry. Here, husbandry means thrift or “living within your means”, and it isn’t hard to see that this is true. The United States – and many of its citizens – spent more money than it should have (and much more inefficiently), simply because we were using borrowed money. When we earn money, we tend to spend it much more cautiously because we remember what it took to acquire the money. When we borrow money, we are spending money that someone else earned – and our spending is a little bit freer than it should be. We end up in debt, paying interest, and worse off. Borrowers are often the ones hurt the most by lending, as so many homeowners have already figured out, and our government eventually will.

The last three of these quoted lines, “to thine own self be true” are even more famous than the first three. But what is the United States (not a bankrupt nation of debtors!), and what is China (not an insecure upstart reliant on Westerners making payments!)? These are questions that reach far beyond the scope of this blog. However, I would humbly suggest that if these two countries focus on clarifying to themselves what they are, then – and it must follow, as the night the day – they will be able to deal with each other on a much more honest and reasonable level, even if they are never likely to comprehend each other.