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Friday, December 30, 2005

Foreigners Hold Our Economic Fate In Their Hands?

Is there some sinister threat to the US economy with foreigners holding so much US debt? Mike Taylor provides this explanation:

My grasp of economics is rudimentary at best.

But I’ve heard a few Democrats say that we’re “in debt” to China or “we’re borrowing money from China” at alarming levels or that “China is propping up the US as the US is its best customer”. Their aim seems to stir up fear among the voting population that Bush deficit policies are putting Americans at a disadvantage to Asian countries.

(As if China could re-possess American housing and throw Americans into the street, homeless. But China has not purchased hard assets, they purchased federal debts backed “by the full faith and credit of the United States of America”.)

If you want to read a little further about this “sky is falling” theory I direct your attention to an article in an April 2005 issue of “The New Yorker”:


An excerpt: “The Japanese, who despite their creaking economy remain flush with savings, bought a quarter trillion dollars of American debt last year, even though the interest is lousy and the assets themselves are losing value. More than any other nation in history, the United States depends, economically, on the kindness of strangers. Right now, Asian investors appear very kind.”

This is a gigantic load of B.S. …in my humble opinion.

First off, the writer was quickly proven wrong about the “creaking economy” of Japan in the remaining 8 months of 2005. The Nikkei is up +40.2% for the year, Japanese deflation seems on its way out, the GDP of Japan is predicted at +2.4% next year… and if I cared to Google other Japanese statistics I’d probably find some more good news. If that’s “creaking” I’d like to see what the writer thinks is robust.

Secondly, “the interest rate is lousy”. If there’s one thing that interest rates are, they are not “lousy”. Would anyone like to go back to the Jimmy Carter days of non-lousy interest rates? Does that signal economic strength? I didn’t think so.

Thirdly, the “assets” of the United States are not losing value. I guess the writer was following the Democratic National Committee talking points about how the American economy was on the skids. As Milton Friedman so adroitly pointed out, only the creation of inflation will lessen the value of American debt in relation to other debt.

Fourth, investors are never “kind”. Investors look for the best return at an appropriate risk. There is a simple reason that federal US debt attracts so many. We have the world’s fastest growing economy, we represent the lowest risk in the international community and THAT’S the reason the interest rate is low. We don’t need a high interest rate to attract investors for our debt issues.

Fifth, I take the phrase “more than any other nation in history” to mean that the US has more debt issues held by foreigners than other nations. Is this a bad thing? Only if you believe that foreigners expect to LOSE their investment in US debt. Rather, the amount of US debt held by foreigners indicates the United States is a damn good place to put your money IN COMPARISON to other countries right now. Anyone for buying the debt of France or Germany? Does the EU seem a better risk to you?

(And no, it wasn’t Paul Krugman writing in the New Yorker… but he’s also been SPECTACULARLY wrong about both Japanese and American economies for YEARS now… who gave him that medal in economics anyway?)

If any particular nation (say China) wanted to do damage to the US economy by “dumping” it’s accumulated US debt suddenly on the marketplace it would be very unwise to do so. Other nations would step forward to purchase the debt of a growing, stable and low-risk debt issuer. AND they’d have to buy US dollars to purchase that debt. And what would China do with all that hard currency? Stuff it into the nation’s mattress? Invest it in North Korean debt?

If there is one fascinating aspect of an efficient market is that it always, ALWAYS finds an equilibrium point.

It’s a beautiful thing.

-- Mike


At 6:46 PM, Anonymous human pheromone said...

thanks for the info


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