Friday, 13 March 2009

Wen Jiabao, "a little bit worried" about U.S. defaulting.

China's Premier Wen Jiabao has just been speaking at a news conference. I wrote down some of his words...

"Of course we are concerned about the safety of our assets. To be honest I'm a little bit worried, and I would like to, through you, call on the United states to honor its word and stay a credible nation and ensure the safety of Chinese assets".

Obviously the Premier was nervous because he had read my earlier blog entry.

Now the reason I think it is so significant the Wen Jiabao has publicly stated that he is worried about ability of the U.S. to pay its debts is because of something called the "risk premium". Everyone knows that when banks lend to high risk (usually poor) people that stand a higher than normal risk of not paying back then what they do is to charge a higher rate of interest. The "extra" part of the interest being to cover the risk of not getting the money back. Now currently the U.S. borrows money (to finance its great debts) from abroad, by issuing bonds. The bonds are really a statement saying "Give me your $X now, and I'll pay you back $X+bonus% later". Now the bonus% has to be high enough to A) be competitive with interest available elsewhere through other investments AND B) has to be high enough to compensate potential customers for their perceived risk of not getting their money back. So of course the higher the perceived risk the higher the effective interest rate the U.S. has to pay on its borrowings.

Now look again at the table at the bottom of my earlier blog entry... Scared? You should be!

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