Since 1980, the U.S. has imported more than it has exported. It makes up for this trade deficit by issuing Treasury bonds and other debt instruments. Foreign governments have long lined up to buy them.
China holds almost $800 billion of U.S. Treasuries.
That’s the April 2009 figure from the U.S. Treasury (at this moment, the most recent data). In addition, Japan has $686 billion in Treasuries. Hong Kong has $81 billion, Taiwan $78 billion, Singapore $40 billion, India $39 billion, and South Korea $35 billion. Away from Asia, Great Britain holds $153 billion, Russia holds $137 billion, and Brazil holds $126 billion. U.S. Treasury bonds offer these institutional investors some stability in uncertain times.
Are China and Japan wary of buying more?
Earlier in the decade, China, Japan and other nations readily bought Treasuries. From 2004-2008, China spent as much as 14% of its GDP on the purchase of foreign debt – mostly American debt. What happened as a result? China, Japan and other creditor countries got a nice return on their investment and a strong export market. We got to buy inexpensive imports. This kept the dollar strong and interest rates low. Now we have two problems that could potentially sour this relationship.
The economies of China, Japan and other countries have suffered along with ours in the global recession. Moreover, the U.S. has run up a huge budget deficit to accompany its trade deficit. Our President is on record as saying that we may have trillion-dollar deficits for “years to come.” Under these conditions, China and Japan are naturally getting leery of holding so much American debt (especially when the Federal Reserve is printing money to buy it). China needs to pay for its own $600 billion stimulus package, and Japan announced a $154 billion stimulus in April. Tax revenues in both economies have declined with the recession. Government regulators in China have ordered banks to direct money this year to local governments and small- and medium-sized businesses. All this means China and Japan aren’t as eager for dollars and Treasuries as they were a few years ago.
What if other nations stop buying our debt?
There are three potential side effects. One, interest rates would likely increase as there would be fewer buyers for Treasuries. Two, the dollar could weaken. Three, long-term bond prices could fall. Voices on the fringe worry about a scenario in which the central banks of China, Japan and other nations jettison dollars en masse or abruptly quit buying U.S. debt. Realistically, the odds of something like this happening are slim but it is possible.
Need any more evidence? Check out this 5 minute video
Nearly two months ago, Rep. Alan Grayson asked the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went and the trillions of off balance sheet obligations. Not only could Inspector General Elizabeth Coleman not answer the question she seemed bazzled about what was be asked. With all the bailouts, where is the money? Who’s tracking it?
The truth remains! We have a national debt now exceeding over $11.2 trillion, which represents a liability of $36,000 per American citizen. Not only that, but the Trustees of Social Security estimate a current unfunded liability in excess of $100 trillion in 2009 dollars. This means that the federal government has obligated itself to pay more than $100 trillion over and above any taxes it expects to receive. Are we in trouble? I think you know the answer!
The solution? Smaller government, less spending, less taxes and more money to the businesses (big and small) who fuel our economy! I can’t wait for the 2010 mid-term elections, let’s send our government a message: Less is more!
WATCH THIS SHOCKING VIDEO