International Debt Question

[AZRedhawk44]

So, we sell our debt to China and other places.

We just put out a want-ad in "International Debtors Weekly," and say "Looking to borrow $1 Trillion this week.  Any takers?"

China then comes over with a suitcase full of RMB, and we sit down and trade promisory notes for money.

Where does China (or other countries) get the suitcase full of money we get from them?

Is our debt, borrowed on the backs of debt?  Does China owe someone that $1 Trillion, also?  And to whom would that country be indebted, in turn?  Are George Soros, Dr. Evil and Cobra Commander behind all of this, with their volcano lairs and international hedge funds?

Or does China just have disgusting amounts of extra revenue laying around, just waiting to use it as a weapon against our economy and our growing dependency on welfare infrastructure?

[MicroBalrog]

I remember from my ICSEP economics course that China inflates the RMB constantly as a hidden subsidy to its exporters. Seems to me that printing RMB to buy billions of dollars is a great way to do that.

[Scout26]

Or does China just have disgusting amounts of extra revenue laying around, just waiting to use it as a weapon against our economy and our growing dependency on welfare infrastructure?

China (as in their banks and the ME countries) have huge piles of $$$ sitting around from what we paid them for all the cheap plastic crap and oil we buy.

[Headless Thompson Gunner]

China (as in their banks and the ME countries) have huge piles of $$$ sitting around from what we paid them for all the cheap plastic crap and oil we buy.

This.

China buys US debt as a mathematical function of running a trade surplus with us.  They send us cheap bulk manufactured widgets and we send them dollars.  Those widgets pile up on our landfills, and those dollars pile up in their banks.  A lot of those dollars are traded to other countries in exchange for raw materials (metals, oil, etc - the stuff the widgets are made out of), but eventually those dollars from foreign trade need to be parked in dollar-denominated assets somewhere.  

China chooses US treasury debt (and a lot of currency manipulation).  Japan was in a similar situation with us back in the '80s, and they tended to buy up American real estate and businesses.

A lot of fuss has been made recently about China buying fewer treasuries, and it's presumed that this is related to some sort of non-desirability of treasuries or of the US dollar.  In reality, it's just a manifestation of the economic slump.  We're buying less crap from China (and everyone else), so China has less dollars to spend on treasuries.

[Tallpine]

It's turtles all the way down 

[drewtam]

China buys US debt as a mathematical function of running a trade surplus with us.  

That only works if the exporter is gov't owned. There are not enough state run companies left to drive the money flow in this manner.

My understanding is that the Chinese central bank (whose leadership is directly appointed by the state officials) uses the excess of inflationary printing to buy US treasuries. The inflationary printing keeps exports strong on the world market, but hurts the wealth building of the Chinese citizen. There is also severe risk that this long run of inflationary printing and lending is causing price bubbles in the Chinese housing and industrial asset markets.

But the resiliency of this market to the world downturn has weakened this theory/criticism.

[Scout26]

All bubbles eventually burst.  When they are small the effect is not so much, when they are big, well.....

[MechAg94]

That is why we need to get the budget balanced as a first step.  If we can balance the budget and keep it balanced with a little surplus, at least that debt stops growing.  (speaking to the choir I guess)

At one time, it was thought that if we just stop adding to the debt, we don't have to pay it all off immediately, just let it sit.  As the economy and GDP grow, it would become smaller and smaller as a percentage of GDP.  At the present time, I'm not sure if that same plan would work.