Originally Posted by DVPGSR
Out of curiosity, how is it that China holds so much of the US national debt? Is it because we buy so many of our goods and durables from China that over time they have floated us loans? That is interesting.
Actually, you're very close. You see, China has a fixed exchange rate system. In order to control the price of the Won in relation to the dollar, the government steps in and buys or sells dollars on the open market until the desired price is reached. For years (8+) they've been overvaluing the dollar by purchasing large quantities of it.
Why would China overvalue the dollar? Easy. It keeps prices of Chinese imports low on the US market. The boost in GDP that they recieve more than pays for the dollars they have to purchase. Some of the dollars are stockpiled and the rest are used to buy securities.
To put quantities in perspective, since our economy took a crap China has been purchasing so much American money that the increase in their money supply is actually causing inflation.
Originally Posted by DVPGSR
And if we owe ourselves about 80% of our national debt why can we not just forget about it and wipe the slate clean? What would be the ramifications?
Essentially the federal government would be defaulting on a bunch of loans made to it by various US lenders.