Tuesday, June 9, 2009

The Godfather

One of my favorite movies of all time is the Godfather. There are multiple scenes I love in that movie; however, one scene that stands out is at the wedding of Don Corleone's daughter. Don Corleone is in his office and people are visiting him asking for a favor. As he grants a favor, he reminds that person that someday he will return the favor to him.

I am afraid America is the person approaching the Godfather and the Godfather is China. Over a $2 trillion of US government bonds have been purchased by Chinese government. The money provided by China is allowing us to float our current deficit. Without that country's assistance, the majority of the free spending the US government is doing would not be possible.

Unfortunately, this relationship may be fine for now; however, this may be different in the future. We may not have the leverage that we had in the past when dealing with China. This shift in the balance of power may impact our ability to influence China in the many areas, including fighting global warming.

It is projected that China and India will pass the US in the leaders in carbon emissions. Both countries have robust economies, which require a lot of energy to fuel their expansion. The cheapest form of energy to maintain this pace of growth is coal. Coal emits the largest of amount of CO2 emissions. According to the New York Times, China currently uses more coal than the US, Europe and Japan combined. In many cases, China is using new energy efficient technology in burning its coal; however, coal is still a dirty energy that emits a large amount of CO2.

So when the US approaches China this December in Copenhagen or in the future and asks China to reduce its Co2 emissions, China will remind the US on how much it benefited from using these large Co2 emitters to expand its economy and now China has the right to do the same. What leverage do we really have if China is providing a debt service to our economy. Not much. That is why we need to reduce our debt with China or any other nation because we will have no leverage for forcing these developing countries to forgo immediate growth to reduce the level of CO2 emissions. If we still have more than $2 trillion of US bonds owed by China, that will be a short conversation. In the end, we might have a better chance in asking Don Corleone to give up the mob business and retire to Sicily than we will have with China forgoing its growing use of coal.

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