LESSON 4.2 Foreign Debt and International Power Relations. Social Security

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1 WORLD HISTORY LESSON 4.2 Foreign Debt and International Power Relations debt safety net reform GDP deficit priorities budget Social Security governance discretionary human capital mandatory infrastructure trade-off spending revenue baby boomers Medicare health care economic growth ESSENTIAL DILEMMA Does foreign debt create a dangerous imbalance of power between creditor and debtor nations? INTRODUCTION By continuing to support American Treasury instruments the Chinese are recognizing our interconnection. We are truly going to rise or fall together. We are in the same boat. Our economies are so intertwined, the Chinese know that to start exporting again to their biggest market, namely the United States, the United States has to take some very drastic measures with this stimulus package, which means we have to incur more debt. Hillary Clinton, U.S. Secretary of State (Associated Press, 2009) China, the largest creditor of the world s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China s dollar assets.... Mounting debts and ridiculous political wrestling in Washington have damaged America s image abroad. Xinhua News Agency, the official press agency of China (Associated Press, 2011) For most governments, accruing foreign debt is as normal an act as enforcing laws and collecting taxes. In the event that a government is unwilling to raise taxes or enact deep spending cuts, its only other option is to borrow capital to pay for its expenses. As a result, nations regularly borrow money from both internal and external sources. For example, as of May 2011, the Chinese government held 26% of the United States UNDERSTANDING FISCAL RESPONSIBILITY 1

2 foreign debt, totaling 8% of the United States total public debt (U.S. Department of the Treasury, 2011). Although accruing debt in general is often viewed negatively, the concept of being indebted to foreign entities remains particularly contentious. Some American policy makers have justified accepting loans from external sources like the Chinese government in order to help stimulate a stagnating economy. For example, Douglas Holtz-Eakin, director of the Congressional Budget Office (CBO) under President George W. Bush, said of the United States debt to the Chinese government: Dollars all look the same. Their ultimate source doesn t matter (Schneider, 2005). Historians have also noted that as early as the Revolutionary War the American government has sought credit from external sources. Conversely, many others have argued that these loans make the United States vulnerable to foreign financial influence, leading to an imbalance of power between the two nations. Governments must decide how much foreign influence they are willing to accept in exchange for needed financial investment. In this lesson, students will explore this controversy by comparing the practice of borrowing and lending between individuals with the practice of borrowing and lending between nations. This lesson is appropriate for secondary students (grades 9 12) who have a basic understanding of credit and interest. Following this lesson, students will understand that the implications of the national debt have far-reaching consequences. In short, nations who lend money have a stake in the nations to which they lend, and debtors who receive credit are beholden to their creditors. Students will be able to suggest some of the ways in which debt becomes a point of leverage in the relationship. This lesson depends on the content of articles that have been taken from mainstream media sources. Although excerpts are included to emphasize the main point of each of the articles, students must have access to the full piece in order to complete the activities in the lesson. KEY TERMS The following terms and concepts are used in this lesson and appear in the online glossary: Credit, Economic warfare, Interest, Public debt, Stimulus, Treasury bonds (T-bills, Treasury securities, Treasuries) STUDENTS WILL UNDERSTAND There are consequences for both debtors and creditors when money is lent between nations. Foreign debt can become a point of leverage that creditor nations use against debtor nations. STUDENTS WILL BE ABLE TO Ask good questions and make inferences. Formulate a position or course of action on an issue. Recognize, explain, and analyze causes and consequences. UNDERSTANDING FISCAL RESPONSIBILITY 2

3 RELATED CURRICULUM STANDARDS Common Core State Standards (CCSS) Initiative 1 CCSS.ELA-Literacy.RH Compare the point of view of two or more authors for how they treat the same or similar topics, including which details they include and emphasize in their respective accounts. CCSS.ELA-Literacy.RH Compare and contrast treatments of the same topic in several primary and secondary sources. CCSS.ELA-Literacy.RH Determine the central ideas or information of a primary or secondary source; provide an accurate summary that makes clear the relationships among the key details and ideas. The College, Career, and Civic Life (C3) Framework for Social Studies State Standards 2 D2.His Analyze how historical contexts shaped and continue to shape people s perspectives. D2.His Integrate evidence from multiple relevant historical sources and interpretations into a reasoned argument about the past. NCSS s National Curriculum Standards for Social Studies 3 7. Production, Distribution, and Consumption. Social studies programs should include experiences that provide for the study of how people organize for the production, distribution, and consumption of goods and services. 9. Global Connections. Social studies programs should include experiences that provide for the study of global connections and interdependence. National Center for History in the Schools World History Content Standards 4 Era 9 The 20th Century Since 1945: Promises and Paradoxes, Standard 3. Major global trends since World War II. LIST OF LESSON RESOURCES The following resources are used in this lesson and can be downloaded online: 1. Sam and Chris 2. Cartoon: Great Wallet of China 3. The United States and China: News Articles 4. Major Foreign Holders of U.S. Treasury Securities 1. National Governors Association Center for Best Practices, Council of Chief State School Officers. Common Core State Standards. Washington, DC. Copyright National Council for the Social Studies (NCSS). The College, Career, and Civic Life (C3) Framework for Social Studies State Standards: Guidance for Enhancing the Rigor of K-12 Civics, Economics, Geography, and History. Silver Spring, MD. Copyright National Council for the Social Studies (NCSS), National Curriculum Standards for Social Studies: A Framework for Teaching, Learning, and Assessment. Silver Spring, MD. Copyright National Standards for History: Basic Edition. By Gary B. Nash, Charlotte A. Crabtree and National Standards for History Taskforce. Published 1996, National Center for History in the Schools. UNDERSTANDING FISCAL RESPONSIBILITY 3

4 DAY 1 of 2 ENTRY Frame this lesson for students as follows. Inform them that borrowing between nations is common, but accepting loans from other nations is usually a politically charged, controversial decision. Governments must decide how much foreign influence they are willing to accept in exchange for the investments they need. Tell students that they will be exploring how this controversy is played out between the United States and China by first exploring a controversy that will be easier to analyze a circa-1950 loan agreement between two students, back when newspapers were still delivered by kids on bicycles and saving $3 a week would make a dent in college expenses. The loan agreement is between two students, Sam and Chris. The story is in two parts: The Paper Route and The Conflict. LESSON STRATEGIES AND ACTIVITIES Sam and Chris Divide students into pairs and distribute Resource 1, Sam and Chris. Assign one student in each pair the role of Sam, and the other student the role of Chris. The Paper Route requires that Sam and Chris make a loan agreement. At the end of the negotiations, break and ask each pair to explain and justify their contract to the rest of the class. The Conflict describes the relationship between Sam and Chris 5 weeks into their loan agreement. Ask students to discuss the questions that follow the reading, first with their partners and then with the entire class. Students should describe the developing tension between Sam and Chris and analyze the conflicts of interest between them. The United States and China Begin by asking students what they know about the relationship between the United States and China. Present students with the cartoon Great Wallet of China (Resource 2). Give them several minutes to study the cartoon and then ask them what they notice. Draw students out on the detail of what they see. If students jump to an interpretation of the cartoon, ask them for the basis of the interpretation and ask other students if they agree or disagree. Finally, ask students to consider the meaning of the cartoon, particularly in light of the Sam and Chris story. If students are having difficulty getting into the cartoon, ask them more directed questions such as: ffwho are the two men in this cartoon? [The man on the left is Chinese President Hu Jintao; the man on the right is American President Barack Obama.] UNDERSTANDING FISCAL RESPONSIBILITY 4

5 ffwhy is the cartoonist comparing American debt owned by China to the Great Wall of China? [The cartoonist is arguing that the Chinese government owns a significant, and perhaps dangerous, amount of American debt. The Great Wall of China is the largest man-made structure in the world, hence President Obama s comment that the Great Wallet of China can be seen from space.] ffwhat message do you think the cartoonist is trying to send with this cartoon? See Resource 2 online [Students answers will vary. The two leaders appear strikingly different in the cartoon. President Hu is relaxed and smiling whereas President Obama appears amazed and dismayed by the size of debt flowing into the wallet. Students might suggest that the cartoonist believes the money owed by the United States to the Chinese government is a problem for the United States, but not for China. Students might guess that the cartoonist is critical of the amount of money the United States has borrowed from China because the Great Wall analogy is an exaggeration of the size of the debt.] ffin what ways might the story of Sam and Chris be analogous to the relationship between the United States and China? [In the analogy, Sam, who is lent money, represents the United States, and Chris, who lends the money, represents China. When Sam decides he would like to move on to another job, Chris feels as though he should have a say in Sam s decision, because Sam continues to owe him money. Additionally, Chris would like a guarantee that he will be repaid by Sam.] Conclude the class by asking students to write a paragraph responding to the following prompts: ffin what ways is the loan between Sam and Chris analogous to the loan between the United States and China? In what ways would it not be analogous? ffwhat else would you need to know to answer this question with more authority? DAY 2 of 2 The United States and China: News Articles (If students typically do assignments on the computer at home, this lesson can be modified and these articles can be assigned as homework at the end of day 1.) Download and print enough copies of the full news articles excerpted in Resource 3 to provide each student with one of the articles. Match each article with its question set in Resource 3. Divide the class into groups of three or four students each and distribute copies of one news article to each group. (More than one group may be assigned the same article.) Explain to students that the issues raised in the story about Sam and Chris issues concerning the fairness of the terms of their loan, the inevitable conflict UNDERSTANDING FISCAL RESPONSIBILITY 5

6 of interest between the two parties, and the leverage Chris has over Sam as a result of their agreement are present when there are loans between countries. Tell them that today they will read news articles that discuss the financial relationship between the United States and China and the future of our economic balance of power. Ask students to read their article carefully, discuss it among themselves, and be ready to explain the aspect of foreign debt it describes to students in other groups. When the students in each group understand their news article and have answered the questions related to the reading, scramble the groups to form new ones in which each new group has an explainer for each of the articles. The Teacher s Guide, included in Resource 3, identifies key points for each excerpt. CLOSURE After the groups have had each of the three news articles explained by their classmates, lead a class discussion guided by the following questions to help students clarify their understandings: ffbased on what you have read, how would you describe the current economic relationship between the United States and China? Does either China or the United States hold a majority of the power in this relationship? [China holds a significant percentage of the United States debt and China wants the United States to guarantee that it will repay the debt. Students will likely suggest that both nations incur risks in this relationship. China holds power in the sense that it could hurt the U.S. economy by selling U.S. Treasury bonds at a low rate, which would, in turn, drive the cost of borrowing up for the United States, and possibly increase mortgage rates. On the other hand, the United States holds power in the sense that the Chinese economy is dependent on the sale of exports to the United States. In addition, the Chinese government is heavily invested in the U.S. economy; significant devaluation of the U.S. dollar would negatively impact the value of Chinese currency.] ffwhat consequences might this relationship have for future budget deficits in the United States? [Some economists argue that foreign investors would demand higher interest rates as the U.S. debt levels increase over time.] ffwhat advice would you offer the U.S. government regarding foreign debt? Consider the reasons the United States would incur foreign debt, the risks associated with incurring such debt, and what nations you believe (if any) the United States should not accept loans from. What more would you need to know to answer this question? [Students answers to this question will vary. Students might suggest that the U.S. government work to lower its dependence on foreign investment, while acknowledging the need for loans from external sources. Students might warn that relying too heavily on foreign sources of credit might make the United States vulnerable to foreign influence. Students might recommend only borrowing from nations that are close political allies and can be trusted not to take advantage of economic vulnerabilities. Students UNDERSTANDING FISCAL RESPONSIBILITY 6

7 might also suggest that the United States cut spending or increase revenues to negate the need for high levels of foreign debt. Finally, students will likely need to know how much of a problem the size of the debt is for the country, how much assistance other nations are willing to offer, and on what terms this assistance will be given.] FURTHER ENGAGEMENT Major Foreign Holders of U.S. Treasury Securities As of November 2011, China and Japan had each loaned the United States about $1 trillion. Together, they held 44% of the U.S. Treasury securities sold to foreign countries. Using Resource 4, students will find current data on Treasuries sold to foreign nations and use current news articles to investigate relationships between the United States and major foreign holders of Treasury securities. REFERENCES CITED Associated Press. (2009, February 22). Clinton urges China: Don t stop investing in us. MSNBC. Retrieved from Associated Press. (2011, August 6). Obama absent as China scolds U.S. for debt addiction. CBC News. Retrieved from Faiola, A. (2009, March 14). China worried about U.S. debt: Biggest creditor nation demands guarantee. Washington Post. Retrieved from AR html Lakshmanan, I. A. R. (2009, February 22). Clinton urges China to keep buying U.S. Treasury securities. Bloomberg. Retrieved from Lee, J. (2010, February 26). Paper tiger: China s no threat to the US. Bloomberg Businessweek. Retrieved from Sack, S. (2009, November 19). Great wallet of China. StarTribune. Retrieved from stevesack/2009/11/19 Samuelson, R. J. (2009, October 29). Up against a wall of debt: How much can governments borrow? Newsweek. Retrieved from Schneider, W. (2005, October 25). Re-evaluating U.S. debt. The Atlantic. Retrieved from com/magazine/archive/2005/10/re-evaluating-us-debt/4396/ U.S. Department of the Treasury. (2011, November 16). Major foreign holders of Treasury securities. Retrieved from UNDERSTANDING FISCAL RESPONSIBILITY 7

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