Chinese ant and American grasshopper

By Bill Costello

``The Ant and the Grasshopper," a fable by Aesop, provides a moral lesson on hard work and saving. During the warm months, the ant worked hard to store up food for the winter while the grasshopper sang and played.

When winter arrived, the grasshopper asked the ant for food because it had none. In today’s world, China is like the ant and America is like the grasshopper.

America tends to focus on enjoying today instead of preparing for tomorrow. This trait has led to a nation of debtors. And, like the grasshopper, our lack of savings may lead to our demise.

The grasshopper’s indulgence only affected its own life and not the lives of others. In America, however, that is not the case. America’s indulgence will negatively affect future generations in the form of debt.

America’s federal debt is almost $14 trillion and rapidly rising. If we don’t pay down the federal debt, our children and grandchildren will end up paying for our excesses plus compound interest. Part of the American Dream is making life better for future generations.

While the American Dream is eroding, members of Congress fail to cut spending that would reduce our deficits and debt, and thus we continue to sing and play like the grasshopper.

Meanwhile, China is busy storing up food for the winter. China tends to focus on preparing for tomorrow instead of enjoying today. This trait has led to a nation of creditors. And, like the ant, their savings will help them survive.

In Aesop’s fable, the grasshopper asked the ant for some of the food it saved but the ant refused. In the metaphor I’m using here, however, China is loaning America some of its savings ― with interest, of course.

How did China get so much money that it could loan some to us? The combination of American overconsumption and a Chinese strategy of export-led growth led to export surpluses that the Chinese monetary authorities converted into dollar-denominated reserves to prevent their currency from appreciating. In other words, we bought a lot more stuff from them than they bought from us, they kept their currency cheap so their exports would be cheap while their imports from America would be expensive, and they ended up with a lot of our dollars.

We’ve been borrowing money from China at very low interest rates to finance our current account deficit. The rates have been low because the Chinese have consistently intervened in the currency markets.

China’s savings helped to finance America’s debt habit. And the low long-term rates helped to inflate the real estate bubble, which led to the financial crisis.

That the financial crisis threatens the dollar is making the Chinese very nervous because they own vast numbers of dollars. China has currency reserves of $2.5 trillion, of which roughly 70 percent are dollar-denominated. The Chinese are exposed and will lose if the purchasing power of the dollar falls and/or the price of U.S. government bonds fall.

Because America is experiencing record-high budget deficits and appears to be on an unsustainable fiscal course, the Chinese have been gradually reducing their exposure by cutting back their holdings of U.S. Treasuries and diversifying in other nations.

Other nations could also become nervous and reduce their holdings of U.S. Treasuries. A sustained drop of total foreign holdings would likely lead to higher interest rates and falling stock prices in America. We are, therefore, vulnerable to foreign lenders.

It’s time for America to focus on preparing for tomorrow instead of enjoying today. We can no longer behave as the grasshopper. We must become the ant.

The writer, a master of arts in education, is president of U.S.-based Making Minds Matter, and the author of ``Awaken Your Birdbrain: Using Creativity to Get What You Want." He can be reached at www.makingmindsmatter.com.