This article in CNBC.com yesterday highlights the lengths to which the U.S. government went to appease China during the fiscal crisis of 2008 and 2009.

Confidential diplomatic cables from the U.S. embassies in Beijing and Hong Kong lay bare China’s growing influence as America’s largest creditor.As the U.S. Federal Reserve grappled with the aftershocks of financial crisis, the Chinese, like many others, suffered huge losses from their investments in American financial firms — from Lehman Brothers to the Primary Reserve Fund, the money market fund that broke the buck.

The cables, obtained by WikiLeaks, show that escalating Chinese pressure prompted a procession of soothing visits from the U.S. Treasury Department.

In one striking instance, a top Chinese money manager directly asked U.S. Treasury Secretary Timothy Geithner for a favor.

Lest anyone think that China’s obvious leverage does not affect our foreign policy, there is this:

The concern in certain influential Washington and Wall Street circles is that Beijing would leverage its position as the main enabler of U.S. overspending. And the cables provide a glimpse into how much politics inform relations between the world’s two largest economies.

One cable cites Chinese money managers expressing concern that U.S. arms sales to Taiwan — a major, longstanding irritant in the relationship — could sour the Chinese public on Treasury purchases.

Get that?  It is the “Chinese public” that is so concerned about arms sales to Taiwan.  The authoritarians in Beijing are at the mercy of public opinion.  Who knew? I guess another Tienanmen Square is about to break out any time now.

Is there any better example of the malignancy of our soaring debt than this?

China has the Treasury Secretary running to them with assurances that their investments will be protected, at a time when American pension funds and ordinary American investors are taking massive losses.

Not only that, China more or less demands that its plan to buy over $1 Billion of Morgan Stanley shares get immediate Treasury Department approval (rather than wait the customary 2-week review period) and, magically, the approval is obtained the next day, without any formal application having been filed.

And, oh, by the way, the Chinese public is very concerned about arms sales to Taiwan so the U.S. had better knock that off, too.  (And the Chinese public is also very concerned about any actions that might interfere with Iran’s nuclear weapons program).

One of the unmistakable messages from this article is that China exercises enormous leverage simply by threatening to stop buying up U.S. treasury bonds.   Although the article also claims that China needs to buy treasuries, the article never explains or supports that claim.  The “need” is clearly a one-way street.   China has other places to invest their cash whereas the U.S. cannot find any, other investor that can buy up treasury bills on anything like the scale of China.

This should serve as an urgent wake-up call, particularly to those in Congress who are debating the remaining funding of the federal government for 2011 and the budget for 2012.  The U.S. simply cannot afford to get any deeper into debt, especially not with China.

In our own, personal lives, it is one thing to take a short-term loan from a friendly relative.  No one in their right mind would get deeply in debt to a hostile co-worker.  What the U.S. is doing amounts to getting into deep debt with a loan shark.  Even a community organizer should have some experience with that outcome.

Make no mistake, the only reason that the U.S. has not gone off the financial cliff at this point is because we continue to enjoy incredibly low borrowing costs for our bond sales.  The article makes clear that there is a direct connection between China’s actions in the U.S. debt market and the interest rate that the U.S. has to pay on its short-term and long-term borrowing.  If the cost to the U.S. of borrowing rises in any substantial way, interest payments will eat up huge amounts of the federal budget.   At that point, the U.S. will either have to default on that debt which would have calamitous consequences, or the U.S. will have to print huge amounts of money which would likely result in the kind of hyperinflation that hit, for example, Argentina in the late 1990’s.

Of course, China has to be careful.  It is not in their interest to push the U.S. into default or devaluation of the dollar.  And, as the article notes, the U.S. is the single, biggest purchaser of Chinese exports.  All the same, this is not “mutually assured destruction.”   This enormous leverage that China now holds over the U.S. can render us paper tigers, afraid to take any action that might upset or anger our Chinese overlords.   To put it in loan sharking terms:  while it may not be in China’s interest to kill us, there is plenty of pain that they can inflict short of death.

So, bearing all of this in mind, we are confronted with a President proposing a $3.8 Trillion 2012 budget that requires over $1.4 Trillion (!!) in new borrowing from China, among others.

This is beyond a “lack of leadership” as some have said.  Given the realities of our fiscal situation, I suggest that the President’s budget comes very close to a “high crime and misdemeanor.”