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Stop Being Wrong About China Buying Our Bonds

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Re: Stop Being Wrong About China Buying Our Bonds

#11

Post by RyanZAG »

westicle wrote: post #2

>> Since it's not an investment, it's not an investment the Chinese can lose faith in. And it's certainly not a favor to the United States of America. I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context. I would have thought as a general rule: a debtor at risk (even theoretical risk) of default constitutes a concern to its creditor. I…

Some people believe that China buying US government bonds is a favour to USA as it allows the US government to spend all of this money coming in on various government projects, such as military spending and social security. If China stopped supplying that money, the US government would have to print it themselves (for free), which would lower the value of US currency. Some people believe this is a good thing, and others believe it's a bad thing. There are so many complex and mostly untested effects at play that I'd be a bit worried if anyone claims to have the one true answer here.

  Pro for China buying bonds
  - US government has more money to stimulate economy
  - US dollar remains strong, so buying from offshore is cheap
  - Higher quality of living in USA means more people can
    spend time inventing new industries

  Con for China buying bonds
  - US dollar weaker, US firms are under-priced when exporting
  - When China stops buying bonds it will cause a shock effect
    on US economy
  - Higher quality of living in USA means less people are forced
    to invent new industries or starve
  - US government is wasting the money on stuff like TSA instead
    of using it to grow the economy
These are just off the top of my head. There are far more effects and knock-on effects. Anybody trying to tell you this stuff is simple just doesn't understand it themselves.

Re: Stop Being Wrong About China Buying Our Bonds

#12

Post by jfb »

ck2 wrote: post #10

The biggest comfort about China buying all our debt is they are less likely to invade or nuke us because it would destroy them economically.

Two problems with this: the first Yglesias covers in the OP; the second, that China could nuke us, even if they wanted to.

Re: Stop Being Wrong About China Buying Our Bonds

#13

Post by jbooth »

It's this context (China buying a ton of dollars to maintain their pegged value for the yuan) that completely destroys the Econ 101 theory that say the US should have massive inflation with our low interest rates and quantitative easement that's been happening.

That's why the various gold-standard fans and whoever have been saying "hyperinflation any day now" for the last 5 years and we're still rocking sub-1%.

Re: Stop Being Wrong About China Buying Our Bonds

#15

Post by brazzy »

dnm wrote: post #7

> So what they choose to do instead is to purchase lots of US government debt. Isn't "purchase debt" the same as "give a loan?" Is he saying China is not buying US T-Notes and Bonds? I don't understand how the US Treasury would not be liable for paying back the principal and interest on the bond. And not paying it back is the definition of a default.

The article argues that China is much less concerned about getting those payments than someone giving a loan would typically be (and thus much less likely to stop the practice if they don't get those payments) because they do it primarily to keep the exchange rate favorable for China's industry.

Re: Stop Being Wrong About China Buying Our Bonds

#16

Post by jbooth »

RyanZAG wrote: post #11
westicle wrote: post #2

>> Since it's not an investment, it's not an investment the Chinese can lose faith in. And it's certainly not a favor to the United States of America. I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context. I would have thought as a general rule: a debtor at risk (even theoretical risk) of default constitutes a concern to its creditor. I…

Some people believe that China buying US government bonds is a favour to USA as it allows the US government to spend all of this money coming in on various government projects, such as military spending and social security. If China stopped supplying that money, the US government would have to print it themselves (for free), which would lower the value of US currency. Some people believe this is a good thing, and oth…

A favor? There's no such thing as a favor.

The US offers bonds in $ at a certain very low interest rate and China buys them in order to maintain their low yuan valuation. As stated in the article, this is to manipulate currency prices for domestic reasons to keep their exported goods "cheap" in terms of the global reserve currency, dollars.

Your cons are all messed up. They're making the dollar stronger and the yuan weaker, deliberately, and that makes our firms over-priced when exporting. We've had 1% inflation for like 5 years now.

If they didn't have that industrial policy, we'd probably have to be selling our 30-year tbonds at 3-4% instead of sub-1% as they are now. They do have the policy, so we should frankly be selling more bonds and spending the money on infrastructure, but hey, that's a hard story to sell for some reason.

Re: Stop Being Wrong About China Buying Our Bonds

#17

Post by code4life »

Today China in essence suppresses the standard of living of it's productive sector. They do this by not allowing the exporters to keep the dollars they earn. Instead the exporters are forced to trade those dollars in for Chinese currency which is artificially pegged against the dollar. This means the exporters immediately lose value.

What the author completely fails to understand is that this is another possible outcome: * China decides to increase the standard of living of it's citizen * China slowly increases their currency peg to be closer to the value of the dollar * The exporters slowly have a higher profit, and thus the people a higher standard of living * The united states slowly lowers it's standard of living

Of course this is one possible outcome. However, the idea that the Chinese are forced to buy our bonds is ridiculous. They could just buy 1T in oil, copper, or other dollar based commodities. There are plenty of options besides treasuries.

Re: Stop Being Wrong About China Buying Our Bonds

#18

Post by bkmartin »

RyanZAG wrote: post #11
westicle wrote: post #2

>> Since it's not an investment, it's not an investment the Chinese can lose faith in. And it's certainly not a favor to the United States of America. I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context. I would have thought as a general rule: a debtor at risk (even theoretical risk) of default constitutes a concern to its creditor. I…

Some people believe that China buying US government bonds is a favour to USA as it allows the US government to spend all of this money coming in on various government projects, such as military spending and social security. If China stopped supplying that money, the US government would have to print it themselves (for free), which would lower the value of US currency. Some people believe this is a good thing, and oth…

Please do not lump Social Security as part of the problem. That program is solvent. Your main point is correct, but maybe medicare is a better example since it is not a self sustaining program.

Re: Stop Being Wrong About China Buying Our Bonds

#19

Post by igravious »

dnm wrote: post #7

> So what they choose to do instead is to purchase lots of US government debt. Isn't "purchase debt" the same as "give a loan?" Is he saying China is not buying US T-Notes and Bonds? I don't understand how the US Treasury would not be liable for paying back the principal and interest on the bond. And not paying it back is the definition of a default.

If country A (China) purchases the debt of country B (US of A) then "purchase debt" in that context is the same as B "issues a bond" which is the same as B "gives a loan". Yes. To the best of my knowledge, yes.

> I don't understand how the US Treasury would not be liable for paying back the principal and interest on the bond.

The US Treasury is liable, yes - but here is the catch that is never mentioned in any of these articles - at what rate? All these bonds are maturing at different times and have different rates of interest, right? So what would be helpful is that rather than saying that country B owes country A n trillion in total is if we were told how much per month (or year, or whatever) it is costing to service the loan - that would make it real. Note, IANAE.

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