Print Story US Treasury Debt
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By cam (Sat Oct 01, 2005 at 05:05:50 AM EST) (all tags)
Foreign holdings of US debt is over 50% now. There seems to be a general feeling that this is bad, but there hasn't been much comment on why.


From the article;

Over half of all U.S. Treasury debt is now held by overseas owners. If that makes you uncomfortable, you are not alone.

For most of recent history, foreigners holding US debt has been 20% or less. The shift began under Bill Clinton, starting around 1993, and accelerated into '94-95. When Clinton finished his 2nd term, foreign ownership of US Treasuries was about 35%.

That ownership has continued to rise under President Bush, and now stands at 52%.

Uncomfortable seems to be the general consensus, but no concrete reasons why other than autonomy of the nation-state's economy and their political ability to manage it. Back in September 2003 I wrote about Japan, China and South Korea owning one third of US securities;

Japan owns a portfolio of US Treasury bonds of $440 billion, China has $122 billion, and collectively Hong Kong, South Korea, Taiwan, Singapore and Thailand own more than $166 billion. The primary buyers of these bonds are the central banks. Of US Treasury Securities, $1,347 trillion ( > a third ) is in foreign hands.

This is consistent with the "Development-State" many of the Asian economies practice. They end up with large trade surpluses with the nations they primarily export to. To ensure that those nations will continue to buy from their export driven economies they plough their surpluses back into bonds which keep interest rates down and allow domestic consumers to buy more exports on credit.

The Development State is nothing new either. It is the Asian style of capitalism which Chalmer's Johnson has written about, that myself and sien have also covered in the past.

The Asian style of capitalism creates an inter-dependency with the consumer driven economies of nations like America and Australia. The US is in a doubly difficult position, as it tries to protect its global military reach. Japan is brutal is gaining economic exceptions through this.

The US military presence on Okinawa is largely paid for by Japan. When the US State department leans on Japan to float their currency, or open their markets, or whatever; Japan quietly mentions that they will stop paying for Okinawa. The Pentagon flips out. They then go and put pressure on the State Department to leave Japan alone.

Occasionally the Pentagon looks to other allied nations to house their overseas military. Darwin in Australia became a candidate to house the US Marine Divisions that were on Okinawa, but Australia was not going to pay for it. So the Marines remained in Okinawa with Japanese dollars.

China is the new player in this economic menage-en-trois. It is the classic development-state. Authoritarian government, state led export development, and massive funding of the consumer economies so money remains cheap and consumers overseas can buy cheap trinkets and shiny baubles from Walmart until they are bankrupt.

However, China does not fund American global projection, if anything they are a self-professed wannabe hyper-power rival on the world stage. The US military remains in greater danger of running out of missiles if it comes to conflict with China. The Chinese military remained modernistically juvenile next to the American techno-military juggernaut.

Globalism has weakened the bonds of the nation-state. Capital now flies around the world, largely uninhibited by artificial legislative borders. Labor is beginning to do the same, as countries discover their diaspora's increasing in number and turgidity.

The monstrous, technically perfect and capital intensive military remains the domain of the nation-state. But the American second amendment remains a source of wisdom. The imperial might of the US military is being blunted, out-foxed and out-innovated by a civil insurgency in Iraq.

The US having so much debt held by foreigners might be bad for the nation-state, and American autonomy, restricting the US's economic and political movement. However, I have not heard any arguments for squeamishness beyond this. I would be interested in hearing them.

cam

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US Treasury Debt | 26 comments (26 topical, 0 hidden)
What would happen... by Idempotent (4.00 / 1) #1 Sat Oct 01, 2005 at 05:24:05 AM EST
... if the other countries started to reject dollars as a method of payment, and as the bonds expired, asked for them to be redeemed and then converted the dollars into something other than dollars?

Would this allow the rest of the world to break the US economy over a small number of years?

But that is from the nation-state's point of view by cam (4.00 / 1) #3 Sat Oct 01, 2005 at 06:04:48 AM EST
if you take an economic rationalists perspective, the foreign governments are funding American credit because they think the American government is a low credit risk. Japan, China and South Korea probably think they will get their principal back with interest.

But nation-states arent always rational actors, often being nationalistically selfish.

It could also be that this a weakness of the Development-State economic model. Japan, China and South Korea have nowhere else to put the money because they cant. If Americans don't buy imported goods the Chinese, Japanese, South Korean, Taiwanese, Thai, Indonesian etc economies all go into the toilet. So the Development-State might warp the global economy to the point of economic collapse. ...

cam
Freedom, liberty, equity and an Australian Republic

[ Parent ]
It may be rational to break the US economy. by Idempotent (4.00 / 2) #4 Sat Oct 01, 2005 at 06:39:47 AM EST
Taking a long term view, the US environmental and foreign policy will cause huge, and expensive, problems for the rest of the world.

[ Parent ]
Dunno by jump the ladder (4.00 / 2) #7 Sat Oct 01, 2005 at 12:29:35 PM EST
If the alternative world powers like China or India are a lot nicer either in terms of environmentalism or foreign policy. Better the devil you know.

[ Parent ]
The devil you know is still a devil (n/t) by Cloaked User (2.00 / 0) #14 Sat Oct 01, 2005 at 03:00:24 PM EST



--
This is not a psychotic episode. It is a cleansing moment of clarity.
[ Parent ]
The devil you don't know is a communist. by debacle (2.00 / 0) #26 Sun Oct 02, 2005 at 12:36:40 PM EST
HAND.

IF YOU HAVE TWO FIRLES THOROWNF MONEY ART SUOCIDE GIRLS STRIPPER HPW CAN YPUS :OSE?!?!?!?(elcevisides).

[ Parent ]
Battered wife syndrome by theboz (4.00 / 1) #17 Sat Oct 01, 2005 at 08:57:06 PM EST
That's what women say to stay with a husband who beats them.
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That's what I always say about you, boz, you have a good memory for random facts about pussy. -- joh3n
[ Parent ]
True by jump the ladder (4.00 / 1) #21 Sun Oct 02, 2005 at 03:39:56 AM EST
But unfortunately there's no world police or battered country refuge so this is where your  analogy breaks down.

[ Parent ]
We can have whatever government we want by theboz (4.00 / 1) #23 Sun Oct 02, 2005 at 05:22:09 AM EST
We just have to convince enough people of it, and then work on it. While we have many problems in our government and economy, it's not unchangeable within our current system.
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That's what I always say about you, boz, you have a good memory for random facts about pussy. -- joh3n
[ Parent ]
Rational? by Herring (4.00 / 1) #15 Sat Oct 01, 2005 at 03:43:16 PM EST
Maybe not. Hilarious: yes.

You can't inspire people with facts
- Small Gods

[ Parent ]
I'd forgotten about that reason. by Idempotent (4.00 / 1) #19 Sat Oct 01, 2005 at 11:13:41 PM EST
Let's get on with it!

[ Parent ]
It's too complicated to say really by theboz (4.00 / 1) #5 Sat Oct 01, 2005 at 06:53:45 AM EST
You are leaving out a lot of other factors that could have disastrous effects on the U.S., which would then result in a sell-off of U.S. assets and possibly even result in all these nations all trying to cash in their bonds at once. Unfortunately, a possible worst case scenario is that the U.S. ends up shut out of the global market once our economy looks like it's dead. Part of that is already starting to happen. Gas prices have jumped over the past year, and natural gas is going to be super-expensive. Also as a result the prices on everything will go up, and inflation is starting to happen. Consumer confidence is already spiraling down, especially since most Americans have been losing the amount of money they make each year, and have been using credit cards and debt to keep living the same lifestyle they always have. Once people stop being able to buy stuff here, the other nations aren't going to be so eager to do business with a nation with a failing economy whose citizens are mostly too poor to be able to continue being consumers.

There are many other things that I think will be detrimental to our economy, but overall I don't see how the economy can go any way but down. There are some industries that I expect to go up, but overall the economy is going to lose. If you're interested in a long term investment that I've been buying and holding onto for a while, check out Vanguard Energy Viper. It's almost like a mutual fund, but sold like a stock, and it's in the energy industry. It has a year to date return of 38.71%. That's better than anything I can get at the bank or investing in technology, that's for sure. It's about as good as I can do on options as well, if I were able to do that in a week or two.
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That's what I always say about you, boz, you have a good memory for random facts about pussy. -- joh3n

[ Parent ]
ETFs by cam (4.00 / 1) #6 Sat Oct 01, 2005 at 07:35:21 AM EST
For long term I do the coffee house investing thing outside of the 401K. A mix of VFINX, VGSIX, VGTSX, VISVX and VIVAX. I also have VPACX.

cam
Freedom, liberty, equity and an Australian Republic

[ Parent ]
What would happen by dn (4.00 / 1) #18 Sat Oct 01, 2005 at 10:55:36 PM EST
... if the other countries started to reject dollars as a method of payment,
Americans would not have the preferred currency, so they would stop buying. Anything dependent on American purchasing power would grind to a halt.
...and as the bonds expired, asked for them to be redeemed and then converted the dollars into something other than dollars?
The ultimate value of dollars is this: Americans need dollars to pay their income tax. If you have dollars, you can make Americans do improbable and/or useful things, like give you a golf course or the Green Bay Packers or the plans for a Trident missile. "Full faith and credit" is a load of hooey; all power grows out of the barrel of the tax man's pen. Trading currencies doesn't change the fundamental value.
Would this allow the rest of the world to break the US economy over a small number of years?
It depends on what you mean by "break". Americans would have to drastically decrease use of cheap foreign goods and services, which would radically increase the value of domestic labor, especially the blue collar kind. The adjustment would be an upheaval, but the equilibrium afterwards would be a social and political improvment. The trade imbalance has forced too many Americans to idleness and under-employment.

It would break the exporters. Everbody with a job in an export factory would become unemployed. Even the Glorious Leaders in Beijing understand what that would mean. Hence the Chinese government's willingness to accumulate giant piles of dollars they have no obvious use for, so the mice stay on their exercise wheel.

    I ♥   
 TOXIC 
WASTE

[ Parent ]
Free market? by Idempotent (4.00 / 1) #20 Sat Oct 01, 2005 at 11:15:02 PM EST
I thought that broken industries were a good thing in a free market, because it gives someone else a chance to take advantage of the new circumstances and make a pile of cash.

[ Parent ]
well by MillMan (4.00 / 2) #2 Sat Oct 01, 2005 at 05:41:04 AM EST
the technology that has created the environment we now call globalization results in a net transfer of power from democratically elected governments to, uh, undemocratic multinationals. I don't know what to do about that. I do think the left will remain rudderless until they figure this out and stop looking for government level solutions to the problems brought on by globalization for the reason I just gave (which is that governments can't do much about it if they want to remain economically competitive).

As far as the debt: ultimately it's unstable, the government can only pay out so much interest. If we get to a point where the government can't meet it's obligations, we'll probably have a sharp economic collapse. But I Am Not An Economist.

"Just as there are no atheists in foxholes, there are no libertarians in financial crises." -Krugman

The thing is by Herring (4.00 / 2) #9 Sat Oct 01, 2005 at 01:25:38 PM EST
how many of these big companies would actually survive in the wild without government help? If the US government couldn't afford to borrow money and give it to the likes of Halliburton?

You can't inspire people with facts
- Small Gods

[ Parent ]
eh, most of them by MillMan (4.00 / 1) #10 Sat Oct 01, 2005 at 01:44:52 PM EST
I'd say the following industries in the US are the ones that have to suck at the teat to survive:
  • Legacy airline companies - who are restructuring themselves into lower cost airlines which will be done in a decade or so
  • Automobile manufacturers - who at this point rely more on customer loyalty than government help
  • Old telecom companies (the old Bell companies) - who depend on their lobbyists' ability to write bills in their favor (leaving the US with shitty broadband access vs. the developed parts of Asia I might add)
  • defense contractors - since they only sell to governments, though, it is hard to say for sure. I think only the huge companies like lockheed and BAE are pulling serious pork barrel money.
The above list really only applies to the big companies in each sector. Most medium to large firms get things like tax breaks and land development funded by taxpayers, but those thing generally just enrich the companies rather than keep them in business.

"Just as there are no atheists in foxholes, there are no libertarians in financial crises." -Krugman

[ Parent ]
Add to that list by cam (4.00 / 1) #11 Sat Oct 01, 2005 at 01:50:28 PM EST
well, in all seriousness by MillMan (4.00 / 1) #12 Sat Oct 01, 2005 at 01:53:56 PM EST
when a company only does business with the government, they're going to be inefficient and slothful in the same way the government is. So you could say they've evolved in a manner that helps them survive in the environment of the government, although they wouldn't survive in any other market.

"Just as there are no atheists in foxholes, there are no libertarians in financial crises." -Krugman

[ Parent ]
Dont know by cam (2.00 / 0) #13 Sat Oct 01, 2005 at 01:54:54 PM EST
I have worked with one DOT that is better run and more efficient than many companies I have been with.

cam
Freedom, liberty, equity and an Australian Republic

[ Parent ]
Energy companies, corporate food/farming by theboz (4.00 / 1) #16 Sat Oct 01, 2005 at 08:56:00 PM EST
These guys are criminal all the way, and while they may be able to survive without "sucking the government teat", they do require a certain level of government corruption to let them get away with what they do. If we truly lived in a nation that enforced free trade and upheld the laws surrounding corporate crimes, we'd be without a lot of these companies like Chevron and ConAgra, or at least the people running them. Fucking crooks.
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That's what I always say about you, boz, you have a good memory for random facts about pussy. -- joh3n
[ Parent ]
The Farm Bill in 2001 by cam (4.00 / 2) #22 Sun Oct 02, 2005 at 04:24:41 AM EST
was approximately 400 Billion USD at the time of signing. In 2001 the bill was larger than Australia's GDP in USD. Congress gave away a subsidy worth as much as the fifteenth largest economy on th e planet.

cam
Freedom, liberty, equity and an Australian Republic

[ Parent ]
Logging companies by debacle (2.00 / 0) #25 Sun Oct 02, 2005 at 12:32:18 PM EST
Huge subsidies there, as well. And lumber costs are still sky-high.

IF YOU HAVE TWO FIRLES THOROWNF MONEY ART SUOCIDE GIRLS STRIPPER HPW CAN YPUS :OSE?!?!?!?(elcevisides).

[ Parent ]
the party line by bukvich (4.00 / 1) #8 Sat Oct 01, 2005 at 01:18:53 PM EST
There was a new york times op-ed a couple months ago written by a former U.S. Treasury secretary saying this was not a bad thing at all. In the "free" market lenders go to the most worthy borrowers. By definition the U. S. economy has the best credit.

In the long run it isn't sustainable but that does not mean the long run won't kick in until after I kick the bucket. It does not look likely that the long run will kick in until after most of the Boomers kick the bucket. Which appears to be the current movers and shakers main motivation.

If I was eighteen I think I would be learning Chinese.

If you were eighteen by debacle (4.00 / 1) #24 Sun Oct 02, 2005 at 12:30:36 PM EST
You would be sitting in high school, and learning next to nothing at all.

IF YOU HAVE TWO FIRLES THOROWNF MONEY ART SUOCIDE GIRLS STRIPPER HPW CAN YPUS :OSE?!?!?!?(elcevisides).

[ Parent ]
US Treasury Debt | 26 comments (26 topical, 0 hidden)