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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

#51

Post by rayiner »

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…

Characterizing it as a "favor" isn't helpful. It's more appropriate to say that there is more to the calculus than just the actual loan. Holding US debt has a direct benefit to China, but also an indirect benefit (it allows the U.S. to keep running huge trade deficits, which benefits Chinese manufacturing). If you look at just the return and risk on the debt, China's actions might not make sense, but if you look at the whole picture they do. At least, that's what the article is trying to get at.

Re: Stop Being Wrong About China Buying Our Bonds

#52

Post by Thrymr »

jes wrote: post #29
bkmartin wrote: post #18

Earlier quoted context omitted.

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.

This article[1] comes to a different conclusion: “Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.” Is the article in error? [1] http://www.forbes.com/sites/mikepatton/2013/06/12/is-the-soc...

That's because Social Security has been running a surplus for many years (until 2010). The question is whether the US government, which already spent that surplus, but gave a bunch of bonds as promissory notes to repay, will actually do so. Payroll taxes were meant to prepare for the baby boom retirement, and were enough to do so, but that money is gone, not in a "lock box".

Re: Stop Being Wrong About China Buying Our Bonds

#53

Post by balabaster »

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…

If anyone thinks that anyone does anything as "a favour to the United States of America", they're deluded. The only reason China (or any other country for that matter) would do a favour like this for the U.S. is that it suits their own political agenda, whatever that may be. I'd be concerned that it's for less obvious reasons then artificially subsidizing their own exchange rate.

Re: Stop Being Wrong About China Buying Our Bonds

#54

Post by jonknee »

mathattack wrote: post #45

The author is very smart, and more trained in economics than I am, but I still disagree with some of what he says. China is doing us two favors: 1) If they weren't buying our debt, someone else would. Without a large buyer like China, we would have to pay higher rates on our borrowing. This would trickle down to mortgages too, since China is a big investor in Fannie and Freddie debt, and mortgage backed securities. 2…

> 1) If they weren't buying our debt, someone else would. Without a large buyer like China, we would have to pay higher rates on our borrowing. This would trickle down to mortgages too, since China is a big investor in Fannie and Freddie debt, and mortgage backed securities.

The point is without the US dollar being propped up against the Chinese Yuan we wouldn't need to borrow as much because exports would be much higher (leading to more jobs, higher tax revenue, etc).

> 2) Chinese goods are cheaper because of this policy. One could argue our domestic industry is less competitive, but on the surface, cheaper goods are better than more expensive goods. We benefit from the subsidy.

Conversely, American goods are more expensive because of this policy. It's difficult to say if we benefit from the Chinese government subsidizing Chinese manufacturing. The price gap is beginning to close because of rising Chinese wages and US manufacturing is becoming more competitive (our wages are still markedly higher, but the shipping costs are much much lower), so it should be interesting to watch the next few years. Especially with the very low cost natural gas supply that's coming online in North America.

Re: Stop Being Wrong About China Buying Our Bonds

#55

Post by _delirium »

Thrymr wrote: post #52
jes wrote: post #29

Earlier quoted context omitted.

This article[1] comes to a different conclusion: “Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.” Is the article in error? [1] http://www.forbes.com/sites/mikepatton/2013/06/12/is-the-soc...

That's because Social Security has been running a surplus for many years (until 2010). The question is whether the US government, which already spent that surplus, but gave a bunch of bonds as promissory notes to repay, will actually do so. Payroll taxes were meant to prepare for the baby boom retirement, and were enough to do so, but that money is gone, not in a "lock box".

It's also been completely expected since the 1980s, so it's weird that this is now being portrayed as some kind of a problem. Reagan proposed an increase in payroll taxes, so that Social Security would run a large surplus for ~25 years, which would then fund the baby-boomer retirement. As far as cash-flow goes, that surplus went into the general treasury during the surplus years, and now it is the general treasury's obligation to repay it to Social Security out of general revenues for the next ~30-40 years.

It's possible people will choose not to do so, but that's not a matter of Social Security being insolvent. That's a matter of people simply not wanting to keep the promises, because they want lower taxes or something. If Social Security is not repaid, then payroll taxes will be retroactively converted to a regressive general income tax, where only income under $114k is taxed, which would be rather bad.

Re: Stop Being Wrong About China Buying Our Bonds

#56

Post by apostate »

One thing that I don't see mentioned often enough in discussions about China's US debt holdings is how much they actually hold. It's less than 10% of the total US debt, and about a quarter of all foreign-held debt. [1]

They are still the biggest foreign owner of US debt, but the majority of treasuries are owned by US entities (households, corporations, state and local governments, the social security trust, and government agencies that purchase treasuries when they have excess revenue). Of course I would count the Fed's massive holding of treasuries as separate from all of this, and there is plenty to worry about with our debt situation. My point is that China is far from "owning" the US.

[1] http://www.treasury.gov/resource-center/data-chart-center/ti...

Re: Stop Being Wrong About China Buying Our Bonds

#57

Post by jonknee »

dllthomas wrote: post #27
jfb wrote: post #12

Earlier quoted context omitted.

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

What would stop China from nuking us if they wanted to?

Mutually assured destruction.

Re: Stop Being Wrong About China Buying Our Bonds

#58

Post by DanBC »

anoncowherd wrote: post #50
anoncowherd wrote: post #28

Earlier quoted context omitted.

>> I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context. Ignore the mainstream "Talking Heads" -economists in the media - they serve two main purposes: 1) Help Wall Street fleece unsuspecting "retail investors", and 2) Maintain the illusion that everything is alright. Austrian Economics is right, and everything else is either wrong or…

Downvote me all you want, but I'm right. Yes, I do realize that's not an argument.

You may have been down voted for tone, not correctness.

Re: Stop Being Wrong About China Buying Our Bonds

#59

Post by [deleted] »

joshuahedlund wrote: post #47
jbooth wrote: post #16

Earlier quoted context omitted.

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…

> 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. Doesn't that put us at increased risk of the policy changing and then having that much more in bonds to roll over when the rates go back up? (Or are we are highly confident that the investment will pay off before the policy changes?)

[deleted]

Re: Stop Being Wrong About China Buying Our Bonds

#60

Post by randomafrican »

code4life wrote: post #17

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 outc…

I think the outcome you outline is very well understood by the author. He clearly says:

> This is Chinese industrial policy and it is conducted for domestic Chinese political reasons and will end some day for domestic Chinese political reasons.

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