Why China Needs U.S. Debt • Hacker News Board

Re: Why China Needs U.S. Debt

#11

Post by newt0311 » Sat, Feb 14, 2009, 7:24 PM UTC

newt0311 wrote: post #9

Eliezer wrote: post #2

China produces more than it consumes and ships the excess to the US. This keeps its economy roaring, but we don't send them back other goods or services. Instead we send them US debt. The Chinese value this sufficiently that they stay in a productive mood and keep on producing, and their economy keeps growing. It's sort of like inflation except that instead of everyone in China having more and more printed Chinese mo…

No. This is the classic sign of a bubble in US govt. securities. One thats been building up for decades. The redesign will come when the Chinese decide to use all this US debt to by US property. They can already buy several Fortune 500 companies outright. Thats going to become more and more prominent. If we are lucky, they will succeed. If not, something, either falling value or the US govt. will interfere sending th…

Update: A way to make sense of this is that China is making a massive bet on the future of the US. Namely, they are assuming that the US will continue to be rich which will maintain the value of US securities which can eventually be cashed out for tangible goods and services. The problem is that the future of the US is dependent in a large part on what the world thinks of it. Thus the catch-22. As long as everybody thinks that the US is rich, they can trade on that. Note that this is just another symptom of a bubble and when this one bursts, its going to make the great depression look like good times.

Re: Why China Needs U.S. Debt

#12

Post by fauigerzigerk » Sat, Feb 14, 2009, 7:27 PM UTC

mattmaroon wrote: post #7

Eliezer wrote: post #2

China produces more than it consumes and ships the excess to the US. This keeps its economy roaring, but we don't send them back other goods or services. Instead we send them US debt. The Chinese value this sufficiently that they stay in a productive mood and keep on producing, and their economy keeps growing. It's sort of like inflation except that instead of everyone in China having more and more printed Chinese mo…

I have always wondered about this. They essentially improve their country by financing our buying. Why don't they simply buy directly? Could they not instead put that excess money into building things they desperately need, like roads and schools? Investing in a first world infrastructure would stimulate growth at home and lessen their reliance on our consumers (whose buying habits have recently become rather fickle)…

They have been building a lot of infrastructure but I think they were simply at capacity. I mean they had more than 10% GDP growth for years. There are only so many engineers and skilled workers. Increasing demand further would have caused even greater inflation and more social unrest than they had anyway. But what you suggest is exactly what they should and probably will do now.

Re: Why China Needs U.S. Debt

#13

Post by [deleted] » Sat, Feb 14, 2009, 8:12 PM UTC

Eliezer wrote: post #2

China produces more than it consumes and ships the excess to the US. This keeps its economy roaring, but we don't send them back other goods or services. Instead we send them US debt. The Chinese value this sufficiently that they stay in a productive mood and keep on producing, and their economy keeps growing. It's sort of like inflation except that instead of everyone in China having more and more printed Chinese mo…

[deleted]

Re: Why China Needs U.S. Debt

#14

Post by rm999 » Sat, Feb 14, 2009, 8:20 PM UTC

newt0311 wrote: post #9

Eliezer wrote: post #2

China produces more than it consumes and ships the excess to the US. This keeps its economy roaring, but we don't send them back other goods or services. Instead we send them US debt. The Chinese value this sufficiently that they stay in a productive mood and keep on producing, and their economy keeps growing. It's sort of like inflation except that instead of everyone in China having more and more printed Chinese mo…

No. This is the classic sign of a bubble in US govt. securities. One thats been building up for decades. The redesign will come when the Chinese decide to use all this US debt to by US property. They can already buy several Fortune 500 companies outright. Thats going to become more and more prominent. If we are lucky, they will succeed. If not, something, either falling value or the US govt. will interfere sending th…

The "bubble" has only been building since Jan 2001 (guess what happened then?) See http://en.wikipedia.org/wiki/File:USDebt.png. It's clear that if Clinton's policies were extended, the public debt would have gone close to ~0.

US debt is just government bonds, etc. The US govt holds China's money, and promises to pay the interest on those bonds when they mature. China owning US bonds actually makes it harder for them to purchase companies and properties in the US (they have a limited amount of free capital). If anything, the Chinese would avoid buying US companies - they would much rather concentrate on building up their own companies.

The Chinese have a few 100 billion dollars invested in US bonds (a tiny fraction of US GDP) mostly because it is a very safe investment. Why is it so safe? Literally, the only reason is that the US can print more money to pay back its debt. US bonds are the safest place to keep money because the US has proven to be such a stable country. Worst case scenario (other than the US collapsing, which is not likely), is the government will print more money and devalue the dollar.

Re: Why China Needs U.S. Debt

#15

Post by rm999 » Sat, Feb 14, 2009, 8:34 PM UTC

Eliezer wrote: post #2

China produces more than it consumes and ships the excess to the US. This keeps its economy roaring, but we don't send them back other goods or services. Instead we send them US debt. The Chinese value this sufficiently that they stay in a productive mood and keep on producing, and their economy keeps growing. It's sort of like inflation except that instead of everyone in China having more and more printed Chinese mo…

The Chinese produce goods because people buy them for cash, not because we "send" them debt (which is another way of saying that they buy US treasury securities).

As long as US consumers purchase 100s of billions of dollars in Chinese goods (the Chinese->US trade was 340 billion in 2008), China will continue to run its factories at full-blast.

Re: Why China Needs U.S. Debt

#16

Post by patrickg-zill » Sat, Feb 14, 2009, 9:14 PM UTC

Two things you can do with US debt:

1. Buy precious metals such as gold and silver and then take physical delivery - COMEX is required to accept US debt as an equivalent to cash. This would raise the price of silver significantly - you can just about corner the market for silver with about $5B to $6B. Buying even a fraction of the gold that China has stated they wish to acquire would send the gold price soaring.

2. Buy other assets such as real estate, commodities like copper, aluminum, steel, wheat, chicken legs, etc. Competing with Americans and Europeans for some of these commodities would also drive the price up.

Bottom line: inflation is coming to America and possibly Europe (which may be in better shape) as well.

Re: Why China Needs U.S. Debt

#17

Post by newt0311 » Sat, Feb 14, 2009, 10:08 PM UTC

rm999 wrote: post #14

newt0311 wrote: post #9

Earlier quoted context omitted.

No. This is the classic sign of a bubble in US govt. securities. One thats been building up for decades. The redesign will come when the Chinese decide to use all this US debt to by US property. They can already buy several Fortune 500 companies outright. Thats going to become more and more prominent. If we are lucky, they will succeed. If not, something, either falling value or the US govt. will interfere sending th…

The "bubble" has only been building since Jan 2001 (guess what happened then?) See http://en.wikipedia.org/wiki/File:USDebt.png . It's clear that if Clinton's policies were extended, the public debt would have gone close to ~0. US debt is just government bonds, etc. The US govt holds China's money, and promises to pay the interest on those bonds when they mature. China owning US bonds actually makes it harder for the…

US debt != US govt. debt.

The bubble started sometime in the 1980s when it became clear that the US was unlikely to ever run a trade surplus. Its been inflating ever since.

Also, bonds are just a proxy for cash. There is effectively no difference except the bonds get interest. Banks are not an option because any cash over $250,000 will have little guarantee. If China ever wanted to purchase US companies, the US govt. securities market would be more than happy to exchange the bonds for hard cash. Also, why would the chinese avoid buying US companies once their economy stabilizes and goes down from the double digit growth? They will buy whatever is most efficient and with their abundance of capital, that may be mean greater investment in American and European stock-markets.

Also, being able to print more money does not make an investment safe. It makes it crap. Read the last sentence you wrote. The key phrase is "devalue the dollar." What exactly is a devalued dollar worth? you tell me but it's not much and it's certainly low enough to wipe out the investment. US bonds are a safe place keep capital because the US government has a reputation of maintaining currency values and honoring debt. A reputation that is more and more divorced from reality as time goes on. Remember something: money != wealth. Also the Chinese government has a few 100 billion (which by the way is not an insignificant amount, have you ever had even a billion to spend? I wish I did.). The Chinese public also has a lot of capital floating around and when considering the country, that capital must be counted.

Re: Why China Needs U.S. Debt

#18

Post by Retric » Sat, Feb 14, 2009, 10:50 PM UTC

DanielBMarkham wrote: post #3

Eliezer wrote: post #2

China produces more than it consumes and ships the excess to the US. This keeps its economy roaring, but we don't send them back other goods or services. Instead we send them US debt. The Chinese value this sufficiently that they stay in a productive mood and keep on producing, and their economy keeps growing. It's sort of like inflation except that instead of everyone in China having more and more printed Chinese mo…

And all that debt? It's payable in guess what? U.S. Money. Welcome to economics.

It's far less complex than you might think. If China did not buy US debt or other debt then there currency would inflate which would harm their economy in the short term.

Just remember China is not stupid and they feel their long term goals are tied with holding a lot of US debt.

PS: Another advantage is they can avoid military and diplomatic confrontations with the US and the rest of the world without a strong military. Compare the US military budget with the trade imbalance and it's not a bad deal.

Re: Why China Needs U.S. Debt

#19

Post by Herring » Sat, Feb 14, 2009, 11:27 PM UTC

Dilpil wrote: post #4

Eliezer wrote: post #2

China produces more than it consumes and ships the excess to the US. This keeps its economy roaring, but we don't send them back other goods or services. Instead we send them US debt. The Chinese value this sufficiently that they stay in a productive mood and keep on producing, and their economy keeps growing. It's sort of like inflation except that instead of everyone in China having more and more printed Chinese mo…

It's a pretty good deal for us though: they produce concrete goods, we pay with abstract ones.

I'm curious, what can China buy using those dollars? Is there really nothing at all? Someone mentioned buying fortune 500 companies, but I rememember the outcry when an oil company was about to be bought.

Re: Why China Needs U.S. Debt

#20

Post by rm999 » Sat, Feb 14, 2009, 11:51 PM UTC

newt0311 wrote: post #17

rm999 wrote: post #14

Earlier quoted context omitted.

The "bubble" has only been building since Jan 2001 (guess what happened then?) See http://en.wikipedia.org/wiki/File:USDebt.png . It's clear that if Clinton's policies were extended, the public debt would have gone close to ~0. US debt is just government bonds, etc. The US govt holds China's money, and promises to pay the interest on those bonds when they mature. China owning US bonds actually makes it harder for the…

US debt != US govt. debt. The bubble started sometime in the 1980s when it became clear that the US was unlikely to ever run a trade surplus. Its been inflating ever since. Also, bonds are just a proxy for cash. There is effectively no difference except the bonds get interest. Banks are not an option because any cash over $250,000 will have little guarantee. If China ever wanted to purchase US companies, the US govt.…

In the chart I linked to, "public debt" is US govt debt. My comment still stands. I won't argue with you that the situation doesn't suck (of course it does), but I will argue that the situation is not dire - the chart I linked to shows that current debt/GDP is around the median since WWII, and it has never been a serious problem before. I will also argue that there is no risk of China taking over the US, at least anytime soon.