So, what's wrong with other countries owning US debt?
People seem to worry incessantly about other countries (esp. China) owning a part of the US national debt. But, what exactly is the concern? What is China going to do? Repossess our car? Hire a collections agent to call us at night? What's the deal?
Answer:
Nothing is inherently wrong with it, as long as the debt doesn't begin exceeding a certain percentage of GDP.
Government debt (and the interest rates demanded by holders of such bills) is inherently well-regulated by market forces.
If holders of US debt noticed that we were running dangerous levels compared to our national income, they'd demand higher interest rates for a higher level of risk.
This would cause a higher amount of borrowing abroad and lower amounts of borrowing in the US --- in the long term the capital flows would cause a correction of either the interest rate or debt.
If debt holders thought we would inflate the debt away - interest rates would increase.
If debt holders thought we would be unable to pay - interest rates would increase.
To summarize, nothing is wrong with the currently US debt levels, or the fact that roughly 1/3 of the debt is owned by foreign countries. The US always makes payments on her T-Bills; other countries buy US debt because they're going to make money on it.
And i'm a loser..lol
It undermines the US economy when other countries, not only China, owns a part of the national debt. Just like banks, they can "sell" these IOU's to other countries in order to raise money if they want to.The buyer can accumulate enough of the IOU's to a point where they can indirectly dictate the credit worthiness of the US. Low credit rating means the ability of the US government to borrow from outside sources would be severely limited. In the movie Flags of our Fathers, the flag raisers of Iwojima was conscripted to generate patriotic fervor among the US citizenry in order to finance the war effort by buying bonds, the reason being that the government was up to its eyeballs in debts that foreign countries, especially the Arabs, were unwilling to sell oil to the US on credit. Imagine WW II with the US without oil to fly planes, run tanks, float ships and operate machineries that manufacture ammunition. Today, countries with huge debts
to foreign countries are forced to devalue their currency, change their trade policies and incur more debts at exorbitant rates of interest because they have been lax in reining in their expenditures to a level that their economies can bear. No, the repo man wont take away our cars, nor will collection agents resort to threatening phone calls at all hours of the day (or night). They can just simply resort to not trading with us anymore. And the way our economy is dependent on foreign trade, that could really spell trouble for all of us..
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Answer:
Nothing is inherently wrong with it, as long as the debt doesn't begin exceeding a certain percentage of GDP.
Government debt (and the interest rates demanded by holders of such bills) is inherently well-regulated by market forces.
If holders of US debt noticed that we were running dangerous levels compared to our national income, they'd demand higher interest rates for a higher level of risk.
This would cause a higher amount of borrowing abroad and lower amounts of borrowing in the US --- in the long term the capital flows would cause a correction of either the interest rate or debt.
If debt holders thought we would inflate the debt away - interest rates would increase.
If debt holders thought we would be unable to pay - interest rates would increase.
To summarize, nothing is wrong with the currently US debt levels, or the fact that roughly 1/3 of the debt is owned by foreign countries. The US always makes payments on her T-Bills; other countries buy US debt because they're going to make money on it.
And i'm a loser..lol
It undermines the US economy when other countries, not only China, owns a part of the national debt. Just like banks, they can "sell" these IOU's to other countries in order to raise money if they want to.The buyer can accumulate enough of the IOU's to a point where they can indirectly dictate the credit worthiness of the US. Low credit rating means the ability of the US government to borrow from outside sources would be severely limited. In the movie Flags of our Fathers, the flag raisers of Iwojima was conscripted to generate patriotic fervor among the US citizenry in order to finance the war effort by buying bonds, the reason being that the government was up to its eyeballs in debts that foreign countries, especially the Arabs, were unwilling to sell oil to the US on credit. Imagine WW II with the US without oil to fly planes, run tanks, float ships and operate machineries that manufacture ammunition. Today, countries with huge debts
to foreign countries are forced to devalue their currency, change their trade policies and incur more debts at exorbitant rates of interest because they have been lax in reining in their expenditures to a level that their economies can bear. No, the repo man wont take away our cars, nor will collection agents resort to threatening phone calls at all hours of the day (or night). They can just simply resort to not trading with us anymore. And the way our economy is dependent on foreign trade, that could really spell trouble for all of us..
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