qtiger

Since every time the question of the national debt comes up, someone asks how much of it we really owe to ourselves and how much is foreign held, I checked it out with the assistance of my International Econ prof.

About 20% of our current national debt is held by foreign countries. Suprisingly, one of the largest holders is China.

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.

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?

qtiger

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.


Essentially the federal government would be defaulting on a bunch of loans made to it by various US lenders.

qtiger

http://www.mlive.com/news/statewide/...0060232040.xml


"Bush's red-ink budget worries economists"

Saturday, January 31, 2004

By Sarah Kellogg
Washington Bureau

WASHINGTON -- When President Bush proposes his 2005 federal budget on Monday, there's one thing taxpayers can count on -- the federal checkbook won't balance.

Congressional officials said Friday that the White House was expecting the budget to be short as much as $521 billion, the highest deficit ever.

Economists say the person all this red ink will most likely hurt is you -- the taxpayer struggling to refinance a house, pay off a credit card or snag a home-improvement loan.

"As the deficits and debt go up, we crowd out the ability of private borrowers to get loans, because the government pushes the private borrowers out of the market," said Michael LaFaive, an economist with the Mackinac Center for Public Policy, a Midland policy group. "That makes it harder to borrow and makes it more expensive to borrow. The homeowners and small investors can't get the money they need and want."

Economists also point out that the $4 trillion federal debt is eating up more than available investment capital. It's also devouring valuable federal tax dollars. In 2003, the federal government spent $153 billion on interest payments on the debt.

Think of it this way. That's enough money to have built the Detroit Lions a new $500 million Ford Field almost every other day last year. Or a month of interest payments could have financed the state's entire $12.8 billion school aid budget.

A quick economics lesson might help here. The debt is what the government owes its creditors, the businesses, individuals and foreign countries that purchase government bonds and notes.

The deficit is the difference between what Congress budgets for the fiscal year and what it actually spends. In 2003, the federal deficit was $374.2 billion.

In recent weeks, a number of national and international economists have issued warnings about the dangers of high federal deficits and the ever-mounting U.S. debt.

At the top of their list of concerns is inflation. When the economy was in the dumps, excessive federal spending and deficits served to jump start growth. With the economy improving, large deficits could overheat the economy, sparking inflation and higher prices for just about everything.

And with inflation comes a jump in interest rates. The Federal Reserve Board often uses interest rate boosts to combat inflation.

Raise interest rates from 6 percent to 7 percent, and the monthly payment on a 30-year, fixed-rate mortgage of $250,000 rises from $1,500 to $1,663, according to the Brookings Institution, a Washington think tank.

Not everyone is convinced that growing deficits will harm the economy or taxpayer pocketbooks in the short term. Some economists believe that if deficits stay below a certain percentage of the gross domestic product -- the total value of all goods and services produced in the United States -- then the deficits aren't a major threat. In the short term, that is.

"There's a huge problem, but it isn't the deficit," said David Littman, an economist with Comerica Bank. "What undermines the health of the economy is not the deficit but the spending that continues unabated. Congress needs to stop spending money it doesn't have, or we could be facing some very serious problems."

Bush's budget on Monday most likely will set the tone for the debate in Congress this year. It is expected to draw some fire, since it will include his plan to make permanent temporary tax reductions adopted in the last two years. Some say the tax increases could cost the federal government $1.7 trillion over the next decade.

His spending plan will begin to place a down payment on the Medicare prescription drug bill as well. When it was approved in December, congressional budget crunchers estimated it would cost $400 billion over 10 years. Bush officials say they now expect it to cost $533 billion.

Political observers say that while the majority of voters aren't complaining about the growing deficits and debt, there is a danger for politicians to ignore the financial implications of deficit-spending for too long.

"I think people do understand the idea that if you wrack up a big debt today, it's going to be repaid by your kids down the road," said Craig Ruff, president of Public Sector Consultants, Inc., a Lansing policy group. "At some point, they're going to say 'enough is enough.'"