The Effects an Attack on Syria May Have on the US Debt in China and Russia. Matthew Hughes. mdh82. Department of Economics: The University of Akron

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1 Hughes 1 The Effects an Attack on Syria May Have on the US Debt in China and Russia Matthew Hughes mdh82 Department of Economics: The University of Akron Fall 2013 Abstract: This paper contains a short economic analysis about how the US economy could be affected by actions on our debt held by China and Russia brought on by anamerican attack on Syria. The information is based on the idea that the US attacks Syria, and that China and Russia are angered enough to fight back through an economic means. The focus will be on economic effects, rather than military, focusing on the damage that can be done by the two countries with the amount of US debt they hold (~ 25% of total foreign debt). If angered enough by US involvement in Syria, China and Russia could cause a large amount of destruction to the US debt and currency, hindering future US economic performance.

2 Hughes 2 In the post 'Great Recession' era, people in the United States should be asking more questions about the economy. In a way, more people should revert to the toddler stage of their lives and ask 'Why?'. Curiosity should play a bigger part in the life of an economist if they wish to gain interest and understand the workings of the economy. Given recent events in the Middle East, focusing on Syria, my interest was peaked thinking about our economy having to deal with any more military action. For this reason, I found myself asking what effect(s) attacking Syria would have on US debt held by foreign countries; specifically, I wanted to know how China and Russia would react. To find some answers, some research on the implications an attack on Syria would have with regard to the holdings of US debt by China and Russia, and how the US economy would be affected, is needed. Currently, President Obama is contemplating a plan of attack on Syria as punishment for the Syrian military s use of poison gas against civilians believed to support the rebels in the civil war that has been raging for more than two years and that has caused some 100,000 deaths and a flood of refugees. i The policing of other countries' affairs has been a recurring action taken by the US, from Hitler's persecution of the Jewish people to the Yugoslavian civil war in the 1940s to as recently as Saddam Hussein's actions in Iraq. While it may be viewed as something that needs to be done to protect the innocent people from being harmed by people within their own country, others are against the attack and claim we should 'keep our noses out of it'. However, President Obama is still pushing to get an attack approved. As noted by one economic blog, survey after survey has shown that the American people are overwhelmingly against an attack on Syria, people around the globe are overwhelmingly against an attack on Syria, and it looks like the U.S. Congress is even going to reject it. But Barack Obama is not backing down. ii It has been made clear that many opponents prefer focusing on domestic economic problems first, instead of prioritizing foreign conflicts ahead of them. Even with very low approval ratings, recently reported as below 30%, an attack is still on the table. Nevertheless, the possibility of an attack on Syria by the US has angered

3 Hughes 3 both the Chinese and Russian governments to the point that both have sent some warships to the region. How Russia and China Come into Play In response to US involvement in Syria, the Russian government has taken a stance against any Obama led attacks. It is known that Syria hosts Russia s only military facility outside the former Soviet Union, at the port of Tartus iii so getting any military personnel into the area wouldn't be difficult. However, the military issue isn't what the US should be most concerned about and won't be addressed further. What we should be concerned about is the $162.9 billion (as of January 2013) of US debt that Russia owns, adding up to approximately 1.4 percent of the total debt. iv While it may not seem like much in the big picture, the long term implications may prove costly to the US economy. In the past few years, the economic situation between the US and Russia has been very tense, especially during the debt-ceiling discussions in 2011 and 2012 which caused Prime Minister Putin to call the US a 'parasite'. Since then, the problem has been solved and Russia has increased its holdings of American debt by tens of billions of dollars to current levels. v As one looks at the figures, it doesn't seem that there would be much to be concerned about, being that Russia holds only a small portion of US debt. However, as it will be discussed in a later section, Russian economic action involving US debt due to our involvement in Syria could prove disastrous. Along with the Russian government being angered, the Chinese government has also threatened to act if the US does continue with its plan on Syria. As with Russia's case, we will be considering only the implications on the US economy concerning the amount of US debt that China holds. Being the world's second largest economy, China would make an obvious candidate at the top foreign holder of US debt. In fact, China held $1.26 trillion of US debt at the beginning of 2013, which makes up approximately 11 percent of our debt. vi The increase in debt held compared to Russia means that more effects could be felt if China decided to act in response to US action. As far as we can tell, there are definitely economic ramifications that most likely would follow

4 Hughes 4 if US involvement in Syria angers the Chinese and Russian governments further. Because of this, we should be aware of what could happen especially as it pertains to our problematic national debt. So What Could Happen? If both Russia and China are angered enough into acting, specifically with relation to the amount of US debt they hold, our economy will feel a huge shock. Both have already entered the military side of it, but the economic side would be even more dangerous. Because each of them hold a relatively large portion of the US debt, both have a fair amount of control over what happens with the debt money. As one writer explained, 'Can the U.S. really afford to greatly anger the rest of the world when they are the ones that are paying our bills?' What is going to happen if China, Russia and many other large nations stop buying our debt and start rapidly dumping U.S. debt that they already own? If the United States is not very careful, it is going to pay a tremendous economic price for taking military action in Syria. vii As far as I can see, this is a very plausible fear to have. So how would the dumping of US debt work? In essence, the countries holding US debt in the forms of government bonds or other securities, would stop buying future US debt and would attempt to sell the debt that they already hold to any willing buyers. By taking this stance, China and Russia could inhibit the US government's ability to deal any debt and cause disastrous consequences in our economy. With the expected 4 trillion dollars to be borrowed in 2013viii, the loss of debt-buyers in China and Russia would cause shocks throughout the US bond market, which would most likely trickle throughout the economy. For starters, when we are unable to sell our debt to foreign countries or these countries begin to get rid of what they already hold, it becomes even more unattractive to other buyers. Becoming less attractive and more dangerous for other countries to hold, US debt will be tougher to deal with and cause increased costs to the US government if they wish to borrow any money from overseas. The increased costs may cause extra money to be raised via taxes, raising interest rates, or cuts of

5 Hughes 5 government programs to have more government funding available. In short, dumping our debt will cause the government to find other ways to raise money that could ripple through to the average citizen. In addition to our debt becoming more risky and less attractive, Michael Snyder writes that if China and other big foreign lenders quit buying our debt and started dumping what they already hold, that would send yields on U.S. Treasuries absolutely soaring. ix The higher yields on bonds will cause bond values to go down which could cause enormous losses to the bond holders. More people would be losing money on previously safe bonds, adding another problem to the mix. Bond markets would suffer and cause less incentive to but money into government bonds, which creates another hole in the flow of money into the government's hands. The increase in yields will also most likely increase interest rates in the US, which will cause an economic slowdown which could be even more dangerous to future economic recovery. Higher interest rates may deter investment, among other things, and cause people to be more wary of any choices they may make. Economic recovery will be stopped with the probable decrease in money flow, making the danger of this Syrian situation increase even more. Conclusion and Wrap Up Theoretically, if any US military involvement in Syria is enough to anger China and Russia so that they begin dumping the US debt they hold, then we would face enormous economic danger. There will be many consequences that would follow, in addition to the few that are briefly discussed above. Because of all the different economic implications that could follow from any action, the US government should reserve any ideas about invading Syria and acting as the 'World Police'. By dumping and/or refusing to purchase future US debt, China and Russia alone could cause some form of devastation that could ripple through the economy to many different sectors. As Snyder said it best, In a word, it would be disastrous. x

6 Hughes 6 i Posner, Richard. "When Should We Interfere in Another Country s Internal Affairs?" 'The Becker-Posner Blog' N.p., 8 Sept Web. 11 Sept ii Snyder, Michael. "Who Is Going To Buy Our Debt If This War Causes China, Russia And The Rest Of The World To Turn On Us?" The Economic Collapse. N.p., 06 Sept Web. 11 Sept iii Snyder, Collapse. iv Roos, Dave, Cristen Conger, and Jacob Clifton. "Top 10 Countries the U.S. Owes Money To." HowStuffWorks. N.p., n.d. Web. 11 Sept v Roos, Top 10. vi Roos, Top 10. vii Durden, Tyler. "Who Is Going To Buy The US Debt If This War Causes China, Russia And The Rest Of The World To Turn On Us?" Zero Hedge. N.p., 07 Sept Web. 11 Sept viii Snyder, Collapse. ix Snyder, Collapse. x Snyder, Collapse.

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