Too risky to lend US? Economist explains why China is slashing treasury holdings

American economist Richard Wolff believes that China’s decision to sell off US Treasuries is a prudent move in response to the United States’ growing debt crisis. With the US now owing an unprecedented $35-36 trillion-more than its entire annual output of goods and services-Wolff warns that this escalating debt presents a major risk for global creditors, particularly China.

In an interview with American journalist Rick Sanchez, Wolff explained that China’s actions are a response to years of increasing borrowing by the US, which has reached levels not seen in peacetime. “What the Chinese are doing is what any prudent investor would tell them to do,” Wolff said. “When someone borrows from you and you lend to them, that’s a nice deal. But if they keep doing it year after year, you risk there coming a point when the lender says, ‘Wait a minute, you’re borrowing too much’.”

Wolff further stressed that the US is at an unsustainable level of indebtedness. “We are at a level of indebtedness we’ve never seen before in peacetime and only very rarely and for a short time in war,” he noted, adding that China’s decision to reduce its lending to the US is driven by the recognition that, if the US defaults on its debt, China would be among the first to suffer.

“And what the Chinese have done, knowing full well that if the United States gets to a point where it can’t pay its debts, you know who it’s going to not pay them to first – the Chinese. Because they’re designated as the bad guy. So, they have been cutting back because it’s too risky.” 

The noted economist pointed out that China is not alone in its assessment. The three major US credit agencies-Standard & Poor’s, Moody’s, and Fitch-have all downgraded the country’s creditworthiness from its former AAA rating. “The Chinese authorities are doing something about it-they’re reducing their lending,” Wolff said.

Reuters recently reported that China, the third largest Treasuries holder, further reduced its holdings to $756.3 billion in May, the lowest since February 2009 when the country’s stock of Treasuries dropped to $744.2 billion. Its holdings declined for a fourth straight month and were far below their peak of more than $1.3 trillion between 2012 and 2016.

Wolff also warned that if other nations follow China’s lead and further reduce their exposure to US debt, the US economy could face significant challenges. “One of two things is going to happen,” Wolff stated. “The United States is going to face a situation it has not faced since the Second World War…it’s going to face a situation where it cannot borrow every time it wants to spend more than it raises in taxes.”

The fallout from this could severely affect American consumers, Wolff cautioned. If the US government is unable to borrow, it may be forced to raise interest rates to entice lenders, which would increase costs for consumers. “If interest rates go up, your monthly payment for your car goes up. Your mortgage on your house goes up. We can’t have that. That’ll destroy our economy,” he explained.

As borrowing options diminish, Wolff predicts that the US government will be forced to implement drastic spending cuts, especially to programs like Social Security. “We’re going to finally see our politicians go to the old people and say, ‘You thought you had Social Security. You don’t,'” Wolff warned, drawing a parallel to austerity measures seen in other countries that have faced similar debt crises.

According to the economist, the US is on the brink of a major economic shift. “We need to pretend we have the situation that we did after World War II. We don’t.”