America's Foreign-Owned National Debt

Bruce Bartlett: 

In short, the acquisition of Treasury securities by the Chinese is the necessary complement to their trade policy. As long as they insist on holding down the value of their currency to stimulate exports they have no choice but to buy large amounts of Treasury securities. If the Chinese stop doing so then their currency will rise against the dollar, which will make Chinese goods more expensive in terms of dollars and American goods cheaper in terms of Chinese currency.

 

It has been the U.S. position for some time that the Chinese should allow their currency to appreciate so as to redress the huge trade imbalance between our countries. But if the Chinese stop buying our bonds it will raise interest rates on Treasury securities. That's probably why the Treasury never presses the Chinese too hard on this issue. However, economist Gary Burtless of the Brookings Institution believes that the increase in U.S. growth resulting from a decline in the trade deficit, which subtracts from GDP, would more than compensate for the increase in interest rates.

 

Further complicating the issue is the fact that the Chinese now own so many Treasury bonds that they are really in the position of being a company's largest shareholder. If they dump their holdings, their price will necessarily decline, thus imposing a potentially large capital loss on themselves.

 

Moreover, the options for what the Chinese might do alternatively with all their assets are limited. If they buy non-dollar-denominated assets it will push down the dollar, which will frustrate their trade policy. And despite U.S. financial problems, Europe's are worse, making euro-denominated bonds unattractive. If the Chinese try to buy American stocks, real estate or other assets they lose liquidity, take on risk and run up against all kinds of political objections. So unless they are ready to go on a buying spree for American goods and services, the Chinese are pretty much stuck.

 

The Chinese dilemma reminds me of a quip once made by economist John Maynard Keynes: "Owe your banker £1,000 and you are at his mercy; owe him £1 million and the position is reversed." (The quote can be found in his collected writings, vol. 24, p. 258.)

 

This does not mean we should be complacent about the Chinese and other foreigners holding an increasing share of our national debt. For one thing, we are sending billions of dollars per year in interest payments overseas. Ultimately, that means an increasing share of the U.S. national income is being exported and enriching foreigners instead of Americans.

 

While I don't worry too much about the Chinese using their Treasury holdings to bludgeon us into taking actions that are against our national interest, neither do I think the current trend is entirely healthy for both countries. The best solution would be for the Chinese to allow their currency to appreciate, which would go a long way toward redressing our trade imbalance, while we reduced our budget deficit enough to finance it domestically. Alternatively, we will have to be willing to accept broader Chinese ownership of private American assets--real estate, businesses and so on--which will certainly raise political tensions. It's something both countries should seek to avoid.

 

As long as the U.S. national debt is entirely denominated in dollars, there is no risk that we will run into the sort of financial crisis that small countries often run into. What gets them into trouble isn't the debt per se, but an inability to acquire sufficient foreign exchange with their own currency to service it. While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is conceivable that it could be forced to do so if the dollar falls sharply and foreign demand for U.S. bonds wanes. That will be the point at which our debt problem becomes more than theoretical and we are really on the road to national bankruptcy

Posted via email from Jim Nichols for GA State House