Commentary. China holds so much American debt that any protectionist move could lead to turmoil if China decides to sell.

In threatening China, Trump fires blanks

The times when a king could refuse to pay the debts incurred to finance his wars are over, when the states were the ones bankrupting the banks. Today, states either bleed themselves to shore up bank failures, or fail themselves.

Those olden times include, for instance, when the Florentine bankers like Bardi and Peruzzi could only succumb to the superabundant power of a cashless crown. The world is turned upside down now. Let’s be clear: In principle, not even the greatest power in the world, the United States, can escape this rule, no matter how strong its political and military weight is.

We can say Obama has done better than Europe to bring his country out of the Great Recession. The unemployment rate has returned to pre-crisis levels and the economy has grown in recent years at a rate that we could define as acceptable.

He has not done enough, though, because social inequalities have reached unacceptable levels, and have grown in inverse proportion to the national wealth. Clearly, something has gone wrong with the “expansive” policy carried out by the government and the Fed: The gulf between the country’s debt limit and the conditions of the population is indeed too big.

Let’s review the numbers. Currently, the U.S. federal debt exceeds $19 trillion, 105 percent of GDP (120 percent if the debt of individual states and municipalities is added). On the eve of the crisis, in 2007, its value was just over $9 trillion, equivalent back then to 65 percent of GDP.

This monster growth can only be partially explained by the so-called Keynesian policies of the Obama administration. Just remember that after the 2007-2008 shock, the bank bailouts cost $500 billion more than the American Recovery and Reinvestment Act, the package of measures to support the economy and the social groups most affected by the crisis, which amounted to little more than $700 billion. Meanwhile, in eight years, the balance sheet of the Federal Reserve, as a result of quantitative easing, has passed from $800 billion to $4.5 trillion. And total debt, including those of corporations and families, has hit a record $70 trillion.

Where did all this money end up? Largely, it served to prop up an economic and financial system that has lived and continues to live dangerously, always on the brink of a new crisis, which regularly suffers the threat of new and more serious crashes.

Too little has been spent on equalization policies aimed at combating poverty and social exclusion. What Joseph Stiglitz calls the “problem of the 1 percent”: the 1 percent of the American population that “takes home each year nearly a quarter of the nation’s income and controls 40 percent of the country’s economic wealth.”

Of course, talking about a collapse of the state is risky — for many it’s even blasphemy. Nevertheless, it is no small matter that over 30 percent (over $6 trillion) of debt held by public entities (i.e. the totality of bonds held by investors outside the government) is in foreign hands.

And 50 percent of that slice of debt is divided in half between China and Japan. These numbers are to be read in close connection with the performance of the trade balance, which has stayed in the red since 1976 (the average negative balance from 2007 to 2015 was about $750 billion a year).

What would happen if China decided to get rid of its U.S. securities? Their nominal value would plunge, and, accordingly, their yield would surge upward. It would exert such a strong pressure on the overall debt, that it would seriously threaten the sustainability in the years ahead.

From this perspective, the protectionist threats of Donald Trump against the Asian giant appear hollow.

Even more so if you consider that over the past five years, Chinese direct investment in American companies has more than tripled. About $70 billion just from the beginning of this year. The president-elect of the United States knows this well. Recently, he held a telephone conversation with his Chinese counterpart and said he was ready for a bilateral clarifying meeting.

Xi Jinping issued a cryptic warning: “The facts prove that cooperation is the only correct choice between China and the United States.” The facts, and the money.

A few years ago, then-President George W. Bush once said that “the standard of living of American citizens is non-negotiable.” The problem is that this way of life is very dependent on debt that is negotiable in the markets. And they know it in Beijing.