
Stop Being Wrong About China Buying Our Bonds - patdennis
http://www.slate.com/blogs/moneybox/2013/10/17/china_bond_purchases_stop_being_wrong.html
======
westicle
>> Since it's not an investment, it's not an investment the Chinese can lose
faith in. And it's certainly not a favor to the United States of America.

I have no formal background in economics, but I'd really appreciate it if
someone who does could explain this statement in some context.

I would have thought as a general rule: a debtor at risk (even theoretical
risk) of default constitutes a concern to its creditor.

I also don't see what giving favours has to do with buying and selling bonds.

~~~
anoncowherd
>> I have no formal background in economics, but I'd really appreciate it if
someone who does could explain this statement in some context.

Ignore the mainstream "Talking Heads" -economists in the media - they serve
two main purposes: 1) Help Wall Street fleece unsuspecting "retail investors",
and 2) Maintain the illusion that everything is alright.

Austrian Economics is right, and everything else is either wrong or meant to
mislead you.

You see, you shouldn't be thinking naughty thoughts like: "Since I
_personally_ can't keep living beyond _my_ means for ever and ever, why could
any government? Don't the 'laws' of economics apply to governments?" (Hint:
they do.)

Go forth and educate thyself: [http://mises.org](http://mises.org)

( Oh, and ignore all the clueless pontificators on HN too )

~~~
jusben1369
Keynes is consistently proven to be far more accurate and effective than the
Austrian school of thought. Keynes mets so much resistance because it's
counter intuitive. Very literal thinkers have trouble with that and are
attracted to the Austrian way of thinking.

~~~
anoncowherd
[https://news.ycombinator.com/item?id=6572124](https://news.ycombinator.com/item?id=6572124)

------
cs702
Step-by-step, in plan English: (1) China sells stuff to US buyers, who pay
with US dollars. (2) A US dollar is essentially a _made-up_ financial
instrument "backed by the full faith and credit" of the US -- it has value
only because US laws make it so -- that is, by government fiat. (3) China
could easily sell all those dollars, but if it did that, the dollar would
depreciate, making Chinese products more expensive for US buyers! Chinese
manufacturers would not like that. So what does China do with all those US
dollars? (4) China buys US treasury bonds -- another made-up financial
instrument, issued by the same government, that pays interest in the form of
more dollars. Effectively, China exchanges one made-up instrument that pays no
interest for another one that does. It's not an "investment" in the
traditional sense of the word.

\--

PS. If you find all of this mind-boggling, you're in good company. When asked
about the value of money two centuries ago, Nathan Mayer Rothschild -- a
member of the famous banking dynasty -- reportedly said that only two people
in the world really understood it, but they disagreed with each other. And
things were a lot simpler back then!

~~~
JVIDEL
The way I see it its actually quite simple: the intrinsic value of X, anything
from a piece of code to a building, needs a standard expression, and that
expression is fiat currency. Currency has a value as long as someone is
willing to trade something for it; the papiermark was worthless because nobody
was willing to trade with it, the moment that happens with the US dollar it
will become worthless as well.

The reason we use these standards is simple: convenience. We can discuss
forever how many lines of code you would have to write to pay for your rent,
and what if your landlord doesn't needs any code? then you have to find
someone who needs code and is willing to trade it for something your landlord
needs and its also equivalent to your rent. Fiat currency in this case is like
the metric system: it works (nearly) everywhere.

~~~
Friterie
It's strange you say it works because it happens that every case of
hyperinflation in history has occurred under a fiat, paper system. Paper is
very easy to debase, but if you want you can go to the "best" "schools" in the
world and they can tell you why it's such a good idea... and maybe one day you
can pick up a job at a central bank. And if you're really lucky your peers
will prefix your name with a sobriquet of high honour as cool as "helicopter".

~~~
kamjam
_It 's strange you say it works because it happens that every case of
hyperinflation in history has occurred under a fiat, paper system._

So what, we go back to the bartering system? It's difficult to trade my skills
as a programmer for food directly.

Not sure what the rest of your statement is saying...

~~~
bradleyjg
I'll give you a hint: it involves a pretty undistinguished metal from any
practical standpoint that for some reason right wing nutjobs are totally
obsessed with.

~~~
kamjam
Sure. But gold, and diamonds and other pretty shiney things only have as much
value as we place on them, the same as paper money.

@21echoes covers everything else I wold add on this.

The US currency used to be backed by gold up until 1934 [1], as did several
other countries[2]. But as times have moved on, there are several other
minerals which have become more important, I think it would become too
difficult to rely on just a single precious metal these days.

[1]
[http://www.federalreserve.gov/faqs/currency_12770.htm](http://www.federalreserve.gov/faqs/currency_12770.htm)
[2]
[http://en.wikipedia.org/wiki/Gold_standard](http://en.wikipedia.org/wiki/Gold_standard)

~~~
Zancarius
> Sure. But gold, and diamonds and other pretty shiney things only have as
> much value as we place on them, the same as paper money.

Whenever I come across the argument that we return to a gold-backed economy,
this is among one of the first things that comes to mind. Gold is worth so
much because it's considered a precious metal and has numerous uses in
industry. But besides the extensive history of its worth throughout the ages
(which probably maps well to its chemical attributes, such as malleability),
there's nothing that suggests it won't eventually become worthless if
civilization values something else (salt, platinum, clean drinking water).

I used to think I was a little crazy whenever I'd have such an argument with
my inner monologue, but now that I see the same point raised by others, I'm
not so sure.

Maybe I still am crazy.

------
drcode
Here's my simplified way of thinking about it:

The Chinese government wants its citizens to be relatively poor. Why? because
then it can use them as cheap labor that is a valuable tool to leverage on the
world stage. Plus, poverty stifles political activism.

How does it keep its people poor? Well, by making sure a USD spent in China
can buy 4x as much rice/milk/chicken/etc in China as it can in the US. This
will mean income of Chinese workers and merchants will also remain low. How
does it do this? By keeping the value of the yuan low, by direct manipulation
of the currency, which it pays for by a high import tariff. (Which, again,
makes Chinese people poorer by making things coming from outside the country
very expensive.)

By using this strategy, the Chinese government uses its people as underpriced
laborers that give it a huge export surplus and which it can use to influence
world events, as well as to generate vast government capital (essentially
capital it is withholding from its citizens) it can use to invest in foreign
companies/governments.

(Of course now the picture is muddying somewhat because the extreme GDP growth
is making many Chinese wealthy anyway, despite all these obstacles.)

~~~
skue
> Plus, poverty stifles political activism.

Do you have evidence to back that up? I can think of a number of examples to
the contrary offhand: The French Revolution was preceded by a financial crisis
and poverty, as was the rise of the Nazism in Germany. There's Mohamed
Bouazizi, the poor and repressed fruit vendor who helped launch the Arab
Spring in Tunisia. And even the Occupy and Tea Party movements that have each
arisen in response to the economic situation within the US.

~~~
klenwell
One of the interesting points I heard made in discussion of the Arab Spring is
that it's not the poor but more privileged classes that generally spark
revolutions. Here's the Wall Street Journal on the subject (I think I
originally heard the idea on NPR):

 _While the poor struggle to survive from day to day, disappointed middle-
class people are much more likely to engage in political activism to get their
way._

 _This dynamic was evident in the Arab Spring, where regime-changing uprisings
were led by tens of thousands of relatively well-educated young people. Both
Tunisia and Egypt had produced large numbers of college graduates over the
past generation. But the authoritarian governments of Zine El Abidine Ben Ali
and Hosni Mubarak were classic crony-capitalist regimes, in which economic
opportunities depended heavily on political connections. Neither country, in
any event, had grown fast enough economically to provide jobs for ever-larger
cohorts of young people. The result was political revolution._

 _None of this is a new phenomenon. The French, Bolshevik and Chinese
Revolutions were all led by discontented middle-class individuals, even if
their ultimate course was later affected by peasants, workers and the poor._

[http://online.wsj.com/news/articles/SB1000142412788732387390...](http://online.wsj.com/news/articles/SB10001424127887323873904578571472700348086)

I think both Occupy and Tea Party movements fit this model. College kids mired
in debt who can't find decent jobs. Aging white middle class conservatives
watching the financial class run away with the lion's share of economic growth
(while being led to believe that's it's being siphoned off by immigrants,
welfare queens, and gay married couples).

Also brings to mind the old "Revolution to Conserve" idea I was introduced to
back in AP American History:

[http://en.wikipedia.org/wiki/Clinton_Rossiter](http://en.wikipedia.org/wiki/Clinton_Rossiter)

~~~
skue
There is a distinction between class and income. In all these examples, people
are still responding to their economic situation.

------
scott_s
I think it's strange to talk about this without mentioning the concept of
reserve currency:
[http://en.wikipedia.org/wiki/Reserve_currency](http://en.wikipedia.org/wiki/Reserve_currency)

It's not just China that has a lot of investment in US dollars - and no matter
what the policy reason is, it _is_ an investment because their wealth is tied
up in the status of the US economy.

Now, our reserve currency status _is_ something that China, along with the
rest of the world, can lose faith in. And if they lose faith - because of,
say, a default - then there's a serious risk that the US is no longer the
reserve currency. And if the US is no longer the world's reserve currency,
then a lot less other countries will buy US Treasury bonds, and US easy credit
and privileged trade status will end.

Planet Money podcast, "Why The World Still Needs Dollars":
[http://www.npr.org/blogs/money/2011/08/12/139583229/the-
frid...](http://www.npr.org/blogs/money/2011/08/12/139583229/the-friday-
podcast-why-the-world-still-needs-dollars)

~~~
dllthomas
I've not been following the connection between currency valuation and threat
of default. I'm not sure if it's just my not seeing some connection (certainly
possible) or others conflating things that aren't actually connected. Why
should I expect less demand for my dollar a week after a US default?

~~~
scott_s
US dollars are the world's currency hub. Let's pretend that there was only one
airline hub in the country, and we're going to say that it's Atlanta, because
I always seem to use that as my connection. (Atlanta is _a_ hub, but it's not
_the_ hub.)

Let's also assume that you _have_ to use the hub, no matter where you fly.
It's easy to see in this scenario that Atlanta will now enjoy a special status
as an airport; everyone has to use it, even if they're not sending passengers
to Atlanta. Now, let's say that the Atlanta infrastructure starts doing poorly
- the ground crews don't get luggage from plane to plane fast enough, the
controllers aren't good at scheduling flights - anything we can think of that
will cause delayed flights. If flights are delayed often enough, then
Atlanta's value as a hub goes down. If Atlanta's value as a hub goes down
enough, airlines may try to move to a hub somewhere else. Atlanta, then, no
longer enjoys all of the perks that come with having every flight in the
country routed through them.

This is a cartoon, of course. Nor is the analogy perfect. But I think it gets
the big idea across: when people do international transactions, US dollars are
often involved. Even when neither side of the transaction is actually in
dollars. US dollars are the world's reserve currency: the US is a large,
stable economy, and the main instrument for storing dollars, US Treasury
bonds, is the most stable security around.

If US Treasury bonds cease to be the most stable security around, then we have
violated a basic assumption of the global economy. The rest of the world may
try to move away from the US dollar as the world's reserve currency, which
means the US would no longer enjoy the special status of being the world's
currency hub.

Adam Davidson (who does Planet Money, which I linked to above) has a NY Times
column explaining that in the short term, investors may buy _more_ Treasury
bonds immediately after a default, but in the long term, we would still likely
lose our reserve status. See, "Our Debt to Society":
[http://www.nytimes.com/2013/09/15/magazine/our-debt-to-
socie...](http://www.nytimes.com/2013/09/15/magazine/our-debt-to-
society.html?_r=0)

~~~
_delirium
Just to add an additional factor, related to stability but not identical: the
size and liquidity of the bond market also matters. An advantage to U.S.
Treasuries is that the total volume outstanding is extremely large, and they
are frequently traded. Therefore even very large trades can be executed quite
easily, without completely swamping the market. If you want to buy or sell $50
billion of U.S. Treasuries, that is quite possible.

Other countries that are considered safe government debt for retail investors
typically have much smaller and less liquid bond markets, which would make
them unsuitable as a place to park China-sized amounts of money. An attempt to
buy or sell $50b of Canadian bonds, for example, would involve 10% of the
entire outstanding issue (and about 200% of average daily trading volume).

That's one issue with the Euro becoming a reserve currency as well. The total
size of the Eurozone is large enough, and the total value of Euro-denominated
bonds is large enough, but the bond market is completely fragmented, since a
unified Eurobond hasn't emerged. Instead, if you want to park a large amount
of money in Eurozone government bonds, you have to trade in all these smaller
markets: French bonds, Polish bonds, Finnish bonds, German bonds, Italian
bonds, etc., each with a different risk and liquidity profile.

~~~
scott_s
Yes, thank you, very good points to add.

------
CrunchyJams
Wow, where to begin...

1). Interest and principle on USTs are paid in USD, so the notion that the
Chinese government simply "wants to send those dollars back to the US" is bunk
since they're ultimately getting more back

2). If the Chinese government wanted to directly influence USD value, they
could also simply hold onto the USD as currency reserves to take it out of the
market / reduce supply

By buying US debt, China is doing the same as the Fed: lowering
yields/increasing prices of USTs via increased demand. This allows the
government to keep borrowing large amounts, which in theory should offer the
cash needed to continue buying Chinese goods.

Moreover, USTs are by far the most liquid high-grade paper available. Pretty
much the only possible investment to support volume of the size China needs.

And, while not likely to be used in the near term, this is absolutely an
investment in defense. Chinese officials have openly supported the notion that
large holdings of Japanese debt could be used as a crippling weapon, why
wouldn't that apply to the US?

[http://www.telegraph.co.uk/finance/china-
business/9551727/Be...](http://www.telegraph.co.uk/finance/china-
business/9551727/Beijing-hints-at-bond-attack-on-Japan.html)

~~~
winfred
>And, while not likely to be used in the near term, this is absolutely an
investment in defense.

How? By dumping them below market rate? US/JPN will just print money and buy
them.

If ever there is a war between these nations, these bonds become worthless
overnight. Make no mistake, these T bonds are liabilities for China, not the
other way around.

~~~
Lost_BiomedE
If the Chinese gov did that after loading up on gold, and backed the chinese
currency with a fraction of gold, they would have a much better chance of
convincing others to drop the US dollar as a reserve currency.

How do you go broke? Slowly, then all at once.

------
velodrome
War is made less likely as a function of economic interdependence.

[http://web.mit.edu/~sabrevln/Public/GameTheory/Journal%20of%...](http://web.mit.edu/~sabrevln/Public/GameTheory/Journal%20of%20Conflict%20Resolution/Information%20and%20Economic%20Interdependance.pdf)

~~~
yxhuvud
Yes, that was a popular theory around 1900 to 1914, when global trade as a
part of global GDP reached a long term maxima that took a very long time to
break (if it has been broken?).

Then came a set of World Wars.

------
jbooth
It's this context (China buying a ton of dollars to maintain their pegged
value for the yuan) that completely destroys the Econ 101 theory that say the
US should have massive inflation with our low interest rates and quantitative
easement that's been happening.

That's why the various gold-standard fans and whoever have been saying
"hyperinflation any day now" for the last 5 years and we're still rocking
sub-1%.

------
apostate
One thing that I don't see mentioned often enough in discussions about China's
US debt holdings is how much they actually hold. It's less than 10% of the
total US debt, and about a quarter of all foreign-held debt. [1]

They are still the biggest _foreign_ owner of US debt, but the majority of
treasuries are owned by US entities (households, corporations, state and local
governments, the social security trust, and government agencies that purchase
treasuries when they have excess revenue). Of course I would count the Fed's
massive holding of treasuries as separate from all of this, and there is
plenty to worry about with our debt situation. My point is that China is far
from "owning" the US.

[1] [http://www.treasury.gov/resource-center/data-chart-
center/ti...](http://www.treasury.gov/resource-center/data-chart-
center/tic/Documents/mfh.txt)

------
ad
Yglesias' extreme language always gets me.

>> It doesn't give China any leverage over the American government

They get some leverage. China's bond buying lowers rates on everything from
mortgages to student loans. I agree that fear mongers overstate this, though.

>> the Chinese ... could order enormous quantities of Chipotle burritos and
then throw them out. But that would be so hideously wasteful as to become
politically untenable.

Even if it were tenable, it would still be a bad idea-- China want to suppress
their currency now, but they're smart enough to know they may need to lift it
later. That's why they buy US Bonds, similar to how the Fed buys or sells
bonds depending on what effect it's going for. We've been in an extended
period of buying so people forget that there are extended periods of selling,
too. This gives them another tool apart from the usual raising interest rates,
etc.

~~~
yxhuvud
>> It doesn't give China any leverage over the American government

Own a million to the bank, and it will dictate your life.

Own a billion to the bank, and you will dictate their life.

------
JackFr
As an identity, the capital account between two countries -- payments made for
capital: land, buildings, financial assets, etc. must equal the current
account payments made for goods and services.

When we buy stuff from China, they get dollars. If you have a surplus of
dollars you want to invest them in something, and that something has to be
dollar denominated. Treasury bonds are safe, liquid and politically palatable
for all sides.

If we stopped buying their stuff, they would stop buying our bonds. If they
stopped buying our bonds, they would have to find somewhere else to invest
dollars.

(Interesting side note -- this dilemma is what led to the creation of the
Eurodollar market -- in the early 1970's the Soviet Union had dollars from oil
sales (the international crude oil market is dollar denominated) and they did
not want to put the money into US domiciled banks -- so the London banks said
we will accept dollar deposits, but are not accountable to the Fed or other US
authorities in these accounts (nor can we borrow at the Fed window) and thus
was born the eurodollar.)

~~~
avn2109
This is a bit of history which they never mentioned in Econ class. Politically
inconvenient for some actors and very interesting.

------
code4life
Today China in essence suppresses the standard of living of it's productive
sector. They do this by not allowing the exporters to keep the dollars they
earn. Instead the exporters are forced to trade those dollars in for Chinese
currency which is artificially pegged against the dollar. This means the
exporters immediately lose value.

What the author completely fails to understand is that this is another
possible outcome: * China decides to increase the standard of living of it's
citizen * China slowly increases their currency peg to be closer to the value
of the dollar * The exporters slowly have a higher profit, and thus the people
a higher standard of living * The united states slowly lowers it's standard of
living

Of course this is one possible outcome. However, the idea that the Chinese are
forced to buy our bonds is ridiculous. They could just buy 1T in oil, copper,
or other dollar based commodities. There are plenty of options besides
treasuries.

~~~
darkarmani
> China slowly increases their currency peg to be closer to the value of the
> dollar -- The exporters slowly have a higher profit, and thus the people a
> higher standard of living

Exporters can't export if the price of their goods increase. It's not that
easy to unroll their current scheme.

> They could just buy 1T in oil, copper, or other dollar based commodities.
> There are plenty of options besides treasuries.

How does one transport and store trillions of dollars of commodities (someone
has to store them even if they are ETFs)? Besides, these commodities have a
lot more risk compared to t-bonds. If the were able to get the same security
as t-bonds in something else, you know they'd be buying those as well.

------
anonymous
It's a global economy. I take it you all agree on that.

I have a question for you: "With respect to importing and exporting, how
important is it to be in balance, or to have trade surplus (versus a trade
deficit)?"

China's strategy is aimed at ensuring it maintains a trade surplus. They have
succeeded for centuries. China will export more than it imports.

And the US? Its strategy is to look for the cheapest labor and goods to
"exploit", whereever those may be found.

What do you think? Which is the better strategy? Does trade balance matter?

As for this article, I have no idea what this guy is on about.

The US is primarily a buyer. China is primarily a seller.

If you accept that as true, then the US's "credit" is important. And who do
you think decides whether a buyer's credit is good?

Would you keep shipping goods to a buyer who could not pay?

------
grimtrigger
> But that's all it is. It's not an investment.

Ridiculous, simply untrue.

Currency manipulation explains the conversion from yuan to dollars, but not
from dollars to t-bills.

Why would China convert dollars to t-bills if they didn't see t-bills as a
better investment than dollars?

~~~
scott_s
I mostly agree, but they don't really have much of a choice. They have to put
the dollars _somewhere_ , and when you're dealing with that many, Treasury
bills are really the only game in town.

~~~
grimtrigger
Why not a commercial bank or an investment fund?

~~~
scott_s
China has about $1.2 trillion (with a 't') in Treasury bills. US GDP last year
was about $15.7 trillion.

Bank of America has about $2 trillion in assets. If the amount of money you
give to a bank is more than half its current assets, then your relationship to
the bank is fundamentally different than anyone else. You're not a _customer_.
You're an _owner._ That's the scale of money that we're talking here. Once you
have this much money to store, it becomes clear that there's no such thing as
a completely safe place. But, out of all of the unsafe places, US Treasury
bills are less unsafe than everything else.

------
lazydon
Peter Schiff explains this by taking example of two trading islands in his
book: [http://www.amazon.com/How-Economy-Grows-Why-
Crashes/dp/04705...](http://www.amazon.com/How-Economy-Grows-Why-
Crashes/dp/047052670X) It's a fascinating book that mostly appeals to
Austrians though but a good one to grasp fundamentals.

Also, Sal Khan has this video on the topic:
[https://www.khanacademy.org/economics-finance-domain/core-
fi...](https://www.khanacademy.org/economics-finance-domain/core-
finance/money-and-banking/currency-tutorial/v/american-chinese-debt-loop)

------
mathattack
The author is very smart, and more trained in economics than I am, but I still
disagree with some of what he says.

China is doing us two favors:

1) If they weren't buying our debt, someone else would. Without a large buyer
like China, we would have to pay higher rates on our borrowing. This would
trickle down to mortgages too, since China is a big investor in Fannie and
Freddie debt, and mortgage backed securities.

2) Chinese goods are cheaper because of this policy. One could argue our
domestic industry is less competitive, but on the surface, cheaper goods are
better than more expensive goods. We benefit from the subsidy.

~~~
jonknee
> 1) If they weren't buying our debt, someone else would. Without a large
> buyer like China, we would have to pay higher rates on our borrowing. This
> would trickle down to mortgages too, since China is a big investor in Fannie
> and Freddie debt, and mortgage backed securities.

The point is without the US dollar being propped up against the Chinese Yuan
we wouldn't need to borrow as much because exports would be much higher
(leading to more jobs, higher tax revenue, etc).

> 2) Chinese goods are cheaper because of this policy. One could argue our
> domestic industry is less competitive, but on the surface, cheaper goods are
> better than more expensive goods. We benefit from the subsidy.

Conversely, American goods are more expensive because of this policy. It's
difficult to say if we benefit from the Chinese government subsidizing Chinese
manufacturing. The price gap is beginning to close because of rising Chinese
wages and US manufacturing is becoming more competitive (our wages are still
markedly higher, but the shipping costs are much much lower), so it should be
interesting to watch the next few years. Especially with the very low cost
natural gas supply that's coming online in North America.

~~~
mathattack
On point 1 - I agree with you in theory, in that anything we spend externally
needs to be paid for by either selling something against it, or borrowing.
This is Germany's issue too: they lend people money, so that others can buy
their goods. My sense is that the Chinese aren't propping the currency up as
much as they used to, but that's not based on hard data.

On 2 - In general countries (though not necessarily specific individuals and
companies) do better with cheaper goods. This is why the gains of trade almost
always exceed the costs. The question is does a forced cheapening by China
create inefficiencies by moving us to tasks that we don't have competitive
advantage? I don't know the answer.

Good discussion, and I appreciate your insights into economics.

------
dageshi
It's at least as much about control. The Chinese don't want people to be able
to push their currency around because they fear the destabilising effect of
money surging in and out of the country and throwing the exchange rate around.

So they have massive dollar holdings in one hand and a central bank that can
print money in another. Effectively they can control their exchange rate from
either side.

------
dnm
> So what they choose to do instead is to purchase lots of US government debt.

Isn't "purchase debt" the same as "give a loan?" Is he saying China is not
buying US T-Notes and Bonds? I don't understand how the US Treasury would not
be liable for paying back the principal and interest on the bond. And not
paying it back is the definition of a default.

~~~
brazzy
The article argues that China is much less concerned about getting those
payments than someone giving a loan would typically be (and thus much less
likely to stop the practice if they don't get those payments) because they do
it primarily to keep the exchange rate favorable for China's industry.

------
ck2
The biggest comfort about China buying all our debt is they are less likely to
invade or nuke us because it would destroy them economically.

~~~
jfb
Two problems with this: the first Yglesias covers in the OP; the second, that
China could nuke us, even if they wanted to.

~~~
dllthomas
What would stop China from nuking us if they wanted to?

~~~
jonknee
Mutually assured destruction.

~~~
dllthomas
MAD is one factor (of many) which stops them from wanting to.

------
w_t_payne
Isn't it also an artefact of the way that the Chinese financial industry is
regulated?

------
Fuxy
Whatever the reason for the investment a debt is still a debt.

------
ausjke
when you owe too much, you become the one in absolute control, the loaner will
pray for your good health before he goes to bed every night, that says it all.

------
DougWebb
I know a thing or two about economics, but I am far, far, far from calling
myself an expert or even reasonably knowledgeable. With that prelude, can
someone explain this:

If China is getting lots of dollars from selling goods to the US, and then
buying lots of US Bonds to keep those dollars out of the Chinese economy,
presumably the bonds are just being held somewhere. They represent a promise
from the US to China that says "Those goods you sold us? We haven't really
paid for them yet, but at some point in the future we will, with a bit of
interest."

So at this point the goods have changed hands, the Chinese workers have been
paid in Yuan, and the Chinese government is holding the excess USD value of
those goods in a big pile of paper.

What happens if the US says to China "You know what? We're not going to be
paying you for those goods afterall. Sorry about that."

Obviously, this will piss off China, but let's ignore the political
ramifications. What are the economic consequences? The pile of paper is now
worthless, so the net worth of the Chinese government drops. Does that matter?
The dollars aren't part of the Chinese economy, so there shouldn't be an
impact there. Is the Chinese government using their US Bond portfolio as an
asset to back borrowing from other countries? Is it counting on the interest
to fund future spending? (Risky gamble if they are.)

Going forward, the Chinese probably won't be so willing to buy more US Bonds,
which would be understandable, and other countries and individuals might be
wary as well. But maybe not, if it's framed as a one-time reset of our debt
(kind of like a bankruptcy) and there's some changes to the way our debt is
managed to make sure it doesn't get out of control again. (Maybe an amendment
to hold all living US politicians, past and present, personally accountable
for a proportion of the US debt weighted by the height and duration of their
office.)

So, maybe we could still sell bonds, and maybe not. If the Chinese stop
buying, they're going to have to come up with another way to keep USD out of
their economy if they want to continue selling goods to the US. That makes me
think they'll keep buying the bonds, especially if there's no material impact
from writing off the value of the existing bonds. Or maybe they'll buy other
things from us. They want a navy, and we've got a bunch of ships mothballed in
various states of disrepair and a need to earn revenue without selling bonds,
so maybe a deal can be struck there. It's got to be cheaper to cleanup and
retrofit an old ship than building a new one from scratch, even if it's less
impressive. They can use the old ones for support ships or something.

Here in the US, I don't think we'd be likely to see fewer Chinese goods coming
in or their prices raised, because both of those would be detrimental to the
Chinese. We'd definitely have to get government spending under control because
we couldn't sell so many bonds (if any), but we need to do that anyway.
Zeroing out a big chunk of the existing debt will eliminate a lot of interest
payments, which would help a lot.

So, does the reluctance to do this all come down to the reputation of the US
Government and the US People's ability to pay back the debt we've accumulated?

------
a8da6b0c91d
If the Chinese dumped their bonds interest rates would spike and this would be
a crisis for the USA. This guy doesn't seem to get that.

~~~
hannibal5
That would be worse for China because the value of CNY would skyrocket
stopping their exports. Value of USD would plummet helping US exports.

Besides, China and foreigners are not anywhere near the biggest buyers of US
debt. Fed is. Chinese and Japanese had actually five month net selling period
earlier this year.

~~~
aliston
It would be a crisis so long as China remains an export-driven manufacturing-
based economy. But, as China becomes wealthier, knowledge-based economy, it
won't be as big a deal. With 1/6th of the world's population, I would think
there would be plenty of domestic buyers.

