Here follows the entirety of Chapter 4 of “Land of the Free” by Krakondack (to be e-published imminently), before edits for easy readability. The Chapter consists of an exchange between President Torres and the Chinese envoy Mr. Zheng. This is reproduced for those interested in the economic factors influencing the relationship between America and China…..
Chapter 4: Visit from an Envoy
Torres spent a half hour reading the news on various web sites on his computer. He enjoyed the coverage given him by the mainstream media but was far too intelligent to treat those obsequious reports as indicative of how the people saw him. He knew too well that there would be suspicious and critical coverage linked from aggregator web sites, so he checked every day to see what his political adversaries were saying. Sometimes the attacks were simply laughable, like when they accused him of actively trying to de-industrialize America. But he had a problem with those who called him a socialist and could not bring himself to understand what their problem was. The word socialist was a pejorative in America but he was sure that deep down most Americans were socialist in a limited sense, regardless their discomfort with the label. Nearly every Representative and Senator from both parties voted for progressive social programs to varying degrees, so what did they consider themselves?
Torres’ private time was interrupted when the intercom buzzed. “Mr. Zheng has arrived at the White House.”
“Have him escorted to the Map Room in the Executive Residence” said Torres to the receptionist. He felt this would be more personal than the Oval Office or the Diplomatic Reception room. They would serve Zheng some tea and let him make himself comfortable for a few minutes. Torres finished his last cup of coffee, shut down his computer and paced around the office anxiously, trying to gather his thoughts and his wits. He did not want to appear agitated at the meeting, but as usual he had too much coffee this morning. It was easy to do when they kept offering him more. He imagined the nerves that Mr. Zheng must be feeling, and reminded himself that he always projected authority well. At last he took a deep breath, checked himself in the mirror, and said “It’s show time.”
Suddenly cheerful and imperious, Torres opened his door and walked the colonnade to the Map Room. “Welcome to the White House Mr. Zheng” he radiated, giving the visitor a firm handshake.
Zheng had been chosen as much for his comfort with the English language and American customs as for his negotiating skills, which were considerable. His family was originally from Shanghai, but Yu-Xin Zheng had grown up in Beijing with stints in Australia and Canada where his father was assigned as a diplomat. His English was consequently very strong, with only the softest Mandarin accent. “Thank you for receiving me at this time Mr. President.” Zheng smiled at the President and sat down in the chair that had been prepared for him across a small table from Torres.
“Your people said it was urgent” replied Torres, looking Zheng in the eye. “I can’t stress enough how we value our relationship with the Chinese people.” Torres consciously used the word “people” rather than “government” when speaking of China, a detail that was not unnoticed by Zheng.
Zheng appeared to relax back in his chair still holding his teacup in one hand, the saucer in the other, then began. “I was asked to come here on behalf of the representatives of the Chinese people Mr. President, which have for some time been America’s largest foreign creditors.”
“As America is China’s biggest customer” retorted Torres, hoping Zheng remembered that the customer is always right.
“Mr. President, a conservative estimate of America’s total debt and social obligations is in excess of 50 trillion dollars. The Chinese are concerned about America’s continued solvency.”
Torres frowned and objected. “Just a second, our debt to China is less than a trillion, and our total debt is only around 10 trillion.”
Zheng avoided eye contact but continued. “Mr. President your total debt is not just 10 trillion, and I’d be happy to explain that to you. You are correct about the amount of debt owed to China, but our concern is with the total debt. Let’s face it sir. When America starts defaulting, your own retirees will not be the first to have their claims defaulted. It’s clear to us that the first losers will be foreign creditors, of which we are the largest.”
Torres held his pen in his right hand and waved it at Zheng in lieu of his finger. “What accusations are you making here? That we’re going to default? We’ve never done anything remotely like that. Furthermore, our seniors are funded from a different pool of funds than the general funds of the Federal government.”
Zheng appeared to tighten his shoulders at the realization that an unavoidable dispute had to be resolved. “Very well Mr. President, we’ll discuss the entitlements. Can you tell me where the money is for your Social Security and Medicare programs?”
“It’s in the trust funds designated for those programs” replied Torres.
“And do they hold cash and bank reserves?”
“Of course not. That would sideline too much cash from the economy. They hold US government securities.”
“Correct” said Zheng, who then looked up straight at the President. “Those securities were issued in exchange for cash, which was then spent. All that’s left is the promise to pay it to the beneficiaries, and you first have to acquire the cash from someone else before you can pay them. By any standard of accounting, that is considered a debt. And when those debts are added to those you acknowledge, it amounts to more than 50 trillion. Our concern stems from our analysis of your ability to raise the money you need to cover your debt obligations, government operations, and programs for your retirees. It is simply an implausible assertion that you can keep all your promises moving forward. And that brings us back to China’s special concern. In a default, we expect to be the first to lose.”
Torres leaned forward across his desk and saw Zheng recoil slightly in his chair. “I’ll say it again Mr. Zheng. The US government will never default on its obligations. We are the most reliable financial entity in the world.”
Zheng was intimidated, but undaunted. He stayed in his seat, motionless. “You’ve defaulted before Mr. President, though not by honestly declaring your inability to pay. Anybody who bought long-dated government bonds in the 1960s suffered a partial default by inflation. This concerns us much more than an overt default.”
Torres was ready to snap. He threw his head back and visibly rolled his eyes. “Inflation is the lowest it’s been in years. You’re losing nothing on the value of your bonds.”
“Forgive me Mr. President, but I must speak the case I was sent to make” replied Zheng, now conscious of Torres’ irritation. He wiped the palm of his hand on his pant leg then continued. “Inflation is at all-time highs when it is correctly defined as an increase in the base money supply. You speak of inflation in terms of prices, which are volatile and are measured subjectively in any event. We don’t focus on prices because they can change dramatically.”
“Then focus on loan defaults, which are deflationary!” said Torres, barely concealing his anger. “Every time a loan defaults and a bank has to write it off, money vanishes into thin air. We’re barely keeping up with that.”
Zheng was not swayed. “Mr. President, that refers to credit and is irrelevant over the course of 10 years because it too is volatile. And that is just the problem. When an economy starts to rely on credit expansion for growth, only two ultimate outcomes are possible. Either there is a voluntary abandonment of that credit expansion which brings on a deep recession, or a crackup boom ensues resulting in the complete destruction of the currency system in place. There can be endless rationalization, hedging and trying to walk the fine line between the two, but in the end one or the other will occur.”
Torres remained silent for some time then stood, walked to the window, looked outside and ignored his guest for the better part of a minute. “We’ll just have to disagree on economics. My advisors are unanimous in their advice, which differs markedly from your argument. But the reason you came here was to make a case for your government. If it is as you say, a question of inflation or default – which I do not concede at this time – which would be less objectionable to the Chinese government?”
Zheng tensed up, gripping his tea cup so tightly it rattled against the saucer in his other hand. He quickly put both down on the desk but he had betrayed his tension and to Torres indicated that this was the moment when Zheng would deliver the crux of his message. Zheng stood up and walked to the far end of the room, glanced at the art on the walls, then continued: “The representatives of the Chinese people want neither option, as either one would destroy the United States as customer and world power. We would like to pursue an alternative form of compensation that does not damage theUnited States.”
“I don’t follow.”
Zheng took a slow step forward, now sensing that he had an opening in the conversation. “China has strategic objectives in the international arena and the United States is often a major obstacle to their achievement. We wish to expand our sphere of influence with your acquiescence. In exchange we will forgive your debt. I’ve been asked to invite you to negotiate these items with representatives of the Chinese people. Upon your agreement to negotiate these items, we will appoint a team to come to Washington to work out the specific details to be in play. We ask that you consult with whomever you need to consult and let representatives of the Chinese people know your willingness to negotiate in one week’s time.”
“So you’re giving me an ultimatum” said Torres in a subdued voice, still standing at the window. “We turn our backs on our allies for money. And if we refuse? Are you going to make the threats, or will those follow at a later date?”
Zheng moved slightly closer to Torres but stopped at about the middle of the room. “Mr. President, I am but an envoy, and in any event it is the fervent hope of Chinathat it never comes to that. The Chinese people are faced with the loss of the value of their hard-earned assets. The money that has gone toChinahas been accumulated by many formerly poor families, at rates of pay Americans would find unlivable. If this value were lost, it would cause such a loss of social stability in Chinathat my government is frightened at the possibilities. So we are looking for an alternative arrangement that would avoid the financial ruin of America while giving China something tangible. Something of value that could create the right circumstances for us to stabilize our society in the difficult years to come.”
“In that case Mr. Zheng, I thank you for your visit. We will be in touch through the Chinese embassy” said a highly irritated Torres. “Now if you’ll excuse me” he said as he quickly shook Zheng’s hand, feeling the sweat on the envoy’s palm, then walked out of the room and down the colonnade back to the oval office.
Back to his office, Torres sat down and started to review the implications of what had just transpired. “China wants us to sell out allies, possibly Taiwan, in exchange for wiping out our debt. No threats have been expressed yet but they have something up their sleeves, that much is certain. He typed an email to Mansour Kurdistani instructing him to convene his advisory council for 2 pm that afternoon. Attendance would be mandatory and any conflicting appointments were immediately to be cancelled. Kurdi was also told to arrange a working meal at around 6 pm with everyone notified that it could be a late evening of work. He signed off and added “count me among your attendees.”
Torres then called an all-cabinet meeting for the following morning at 10 am. Attendance was again mandatory and all conflicting appointments had to be cancelled. He did not want to face the Cobra right now so he would ensure his unavailability until the cabinet meeting where she had to respect her place. He then called his chief of cyber security, requesting that the audio recording of his meeting with Zheng be placed in his secure folder on the White House server. He then walked back to the Treaty Room that he used as his study, ordering his lunch in there. This would give him some quiet time to collect his thoughts and review the recording of his meeting with Zheng, to make sure he had correctly understood everything the man had said.