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Matt Miller

Matt Miller

Posted: December 17, 2009 09:31 AM

Time for a Big Debt Deal With China

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As Democrats move this week to raise America's $12.1 trillion debt limit, we're deep into the usual kabuki-style fuss over this must-pass legislation. The opposition party denounces the fiscal recklessness of the party in power. Chin-stroking scolds cluck about the need for a bipartisan commission. Stenographers in the media inexplicably characterize these commission-mongers as "fiscal conservatives," though they offer not a single concrete proposal to cut spending or raise taxes. It's all so predictable and depressing. If America is fated to sink under a tide of debt, can't we at least bring something fresh to the task?

That's where financial innovation comes in. Usually such ingenuity is the preserve of the private sector -- think of all those incomprehensible securities that drove the economy to the brink. But there's no reason America's financial bureaucrats can't think creatively as well.

Treasury is perpetually anxious about whether China will continue to buy our debt, now that deficits are running over $1 trillion a year, and we're slated to add a stunning $10 trillion in new debt over the next decade. So here's an idea. Instead of worrying about whether the Chinese will show up at our public Treasury auctions every few months, why don't we reach out to cut a deal with China directly via a major private debt placement, as routinely happens with private companies seeking cash from lenders?

We'd ask the Chinese to pick up, say, another trillion or so in Treasury debt over the next few years. We'd let them lock in an interest rate that seems attractive to both sides. Presto! Half the worry (and xenophobia) that comes with today's debt -- will the Chinese, or won't they? -- disappears. It's a long-term business deal, pure and simple.

Yes, the optics of this private placement would be unprecedented and humiliating. But so what? These are extraordinary times. China still has big savings surpluses that need to be invested. We need to borrow massively for at least a few more years. Why worry month-to-month about who will show up to buy our debt, and what sky-high interest rates they might demand? Besides, if we were really worried about looking like weak and profligate idiots, we shouldn't have behaved like weak and profligate idiots in the first place.

An historic private placement would let China feel Warren Buffett-like to boot -- an heroic investor at a time of national need. Maybe as part of the deal (in exchange, say, for an interest rate break) we'd give China, for free, the green energy technology we want them to be using instead of all those dirty coal plants that could lock in emissions woes for decades. Call it a Copenhagen/debt limit two-fer.

In an age of relative American decline, private placement of U.S. Treasury debt with the world's leading Communist power is an embarrassment whose time has come. The mere mention of it lifts the debt limit squabble out of its unbearable rut. And if we're going to go down under the weight of our indulgent refusal to make responsible fiscal choices, let's at least go down with a little brio.