A comment in Forbes magazine on October 14 asked who would foot the bill for the American and European bailouts, and provided the answer “Foreigners First”. It noted that the French government had announced that it would raise the money in the international credit markets, promising taxpayers that they would not have to pay a cent, at least for now. “That is certainly possible,” Forbes wrote, pointing to the central banks and sovereign wealth funds in Asia, the Middle East and Russia. Although returns on US Treasuries and German bonds are presently “unattractive”, Forbes continued: “Yet Western governments can be rest assured that the likes of China will still want to buy up their newly-issued debt.”

China certainly has a huge stake in ensuring the viability of the US economy—the largest market for Chinese goods—as well as the Europeans. Moreover, as the world’s largest holder of foreign currency reserves—some $1.9 trillion—it would appear superficially to be in a good position to help out. Although denied by Chinese officials, some reports have indicated that the Chinese People’s Bank may consider buying another $200 billion in US debt in order to help finance the Bush administration’s $700 billion bailout package.

A closer examination of China’s currency reserves, however, reveals that Beijing’s financial clout is much more limited. Analysts estimate that between 60 and 70 percent of China’s $1.9 trillion in reserves is already invested in the dollar-denominated assets such as US Treasury bonds and the government-backed corporations, mainly the mortgage giants, Fannie Mae and Freddie Mac. As a result, China only has between $600 to $760 billion in reserves—some of which are in euro-denominated assets—to make new purchases of US debt. This is only a tiny fraction of total US public debt, which hit the $10 trillion mark at the end of September, double the figure in 2000.

Even if China were to help fund the US and European bailouts, its assistance would not necessarily be welcome. The Wall Street Journal admitted on September 29 that the US dependency on foreign creditors “has been hard to swallow politically”. It recalled that the main weapon used by Washington in 1956 to force Britain to relinquish control of the Suez Canal was “its threat to slash financial support for Britain, whose economy had been battered by World War II.” After reassuring readers that the US was in a better position than post-war UK, the Wall Street Journal continued: “Even so, foreign lenders have a great deal of sway. If they were to dump US government debt—or be unwilling to buy more—the interest rates needed to attract buyers of Treasury would soar. The already fragile US economy would absorb yet another hit.”

The recent economic crisis is getting deeper, markets look good, at times, but Jpohn McCain’s Main Street is not benefitting from the bailout yet.  But was not the reason for the baiolout to be sure the American people would be safe?  If you believe that then you are more naive than I would ever believe possible.