Why do we have to borrow money from other countries?

[Nocturnal]

Can anyone point me to some reading material as to why we borrow so much money from other countries like China and Japan?

 

[Vageetasjn]

Here are some words to read: http://en.wikipedia.org/wiki/United_States_public_debt

 

[bamacre]

Originally posted by: Vageetasjn
Here are some words to read: http://en.wikipedia.org/wiki/United_States_public_debt

Warning: Loading that link requires at least 4GB of system memory.

 

[Farang]

So if our debt as a percentage of GDP has remained relatively constant, why is such a big deal made about it?

 

[bamacre]

Originally posted by: Farang
So if our debt as a percentage of GDP has remained relatively constant, why is such a big deal made about it?

Because that trend is not going to continue.

 

[StageLeft]

Who knows, basically all countries carry debt, including China. Few countries are not indebted.

 

[bamacre]

http://www.youtube.com/watch?v=OS2fI2p9iVs

 

[rchiu]

Don't think of it as US actually go to China or Japan and borrow money from them. What happen is US issue bonds when they need money and those bond are sold in the market and anyone can buy those bonds.

China and Japan have plenty of current account surplus (rank 1 and 2 in the world), so they have tons of cash in their treasury. So they have to invest on something with those money. US Treasury bills are the safest investment in the world, that's why they buy US Treasury bills. Since they hold US treasury bills, US have to pay interest to them, so in that sense US borrows from them.

So the basic reason why US borrow so much money from other country is that US runs budget deficits every year and they have to issue bond to cover for it. The more bond US government issue, the more foreigner will get a hold of it. Of course there are other things like relative safety of US bond, interest rate of US bond relative to other investment with similar risk level. How much current surplus other countries has...etc.

 

[ProfJohn]

Originally posted by: Nocturnal
Can anyone point me to some reading material as to why we borrow so much money from other countries like China and Japan?

Actually... I don't think we 'borrow' money from them in the traditional sense.

We sell bonds and anyone is free to buy them, including China or Japan. If we didn't sell bonds to other countries our cost of borrowing would go up which would be bad. We should be happy that these countries are willing to invest their money in our government.

Of course I'd be happier if we didn't have to sell any bonds, but that's another thread


UMMM btw I should have read rchiu's comment first

 

[Jhhnn]

It's part and parcel of the world economy and our balance of trade deficits. In a balanced scenario, we'd export as much as we buy, circulating dollars back home. But it's not balanced, therefore, other means need to be found to achieve that if our currency is to hold value. We can either borrow, a short term solution, or we can sell increasing bits of America itself to foreign investors, or both.

Huge federal debt soaks up foreign dollars, holding dollar value artificially high, enlarging and extending the imbalance. Foreign goods remain underpriced, and foreign assets remain attractively underpriced for American investors.

All of which is ultimately self defeating in a nationalistic sense, but most excellent for Americans who have the ability to invest worldwide, diversify into foreign assets. Ultimately, as currency valuation shifts, it's just another money making opportunity in itself, and foreign assets gain value even as American ones diminish...

 

[ericlp]

Originally posted by: ProfJohn

Originally posted by: Nocturnal
Can anyone point me to some reading material as to why we borrow so much money from other countries like China and Japan?

Actually... I don't think we 'borrow' money from them in the traditional sense.

We sell bonds and anyone is free to buy them, including China or Japan. If we didn't sell bonds to other countries our cost of borrowing would go up which would be bad. We should be happy that these countries are willing to invest their money in our government.

Of course I'd be happier if we didn't have to sell any bonds, but that's another thread


UMMM btw I should have read rchiu's comment first

Ummmmmmmmm.... What is so traditional about 9.338 trillion? Doesn't make much sense to me...

We SHOULD be and WE ARE happy they continue to loan out billion to the USA. The problem as the dollar gets weaker and currency becomes devalued ... They will stop dishing out $$ to us and start to want it back.. It is already happening but on a small scale so far. We are still a good place for a secure investment (at the moment)....

 

[Craig234]

Originally posted by: ericlp

Originally posted by: ProfJohn

Originally posted by: Nocturnal
Can anyone point me to some reading material as to why we borrow so much money from other countries like China and Japan?

Actually... I don't think we 'borrow' money from them in the traditional sense.

We sell bonds and anyone is free to buy them, including China or Japan. If we didn't sell bonds to other countries our cost of borrowing would go up which would be bad. We should be happy that these countries are willing to invest their money in our government.

Of course I'd be happier if we didn't have to sell any bonds, but that's another thread


UMMM btw I should have read rchiu's comment first

Ummmmmmmmm.... What is so traditional about 9.338 trillion? Doesn't make much sense to me...

We SHOULD be and WE ARE happy they continue to loan out billion to the USA. The problem as the dollar gets weaker and currency becomes devalued ... They will stop dishing out $$ to us and start to want it back.. It is already happening but on a small scale so far. We are still a good place for a secure investment (at the moment)....

PJ's post seemed to try to make some semantic point but only distract from the issue.

As for the US being a good place for a secure investment: there are investments and there are investments; buying shares of Apple is one thing, a foreign government buying another $100B of our bonds is another. From a layman's view, it seems to me that it's only a matter of time before there are big problems, and that the time line roughly follows this:

1. The period where the US is actually a good investment, declining to the line where it isn't.

2. The period where the US is not a good investment looking only at the investment, but it's so central to the economic infrastructure that it's a net positive to keep propping the US up with more, increasingly bad, investments, because of the benefits to the stability that doing so provides.

3. At some point, it's clear that the US is going to have a coming crash with the investments stopping, and that those who get out first will lose the least. So, there will be an incentive to get out early, and someone will trigger the exit from owning US debt, and like the house of cards it has become, it'll crash, badly and fast. It'll also be somewhat without warning, because the trigger will likely be some government somewhere trying to get out early, not some event. We can look at the crash of the Great Depression for some clues.

The Great Depression, too, had some early problems, and the financial industry propped up by the economy raced to 'fix' the problem by putting more money into available credit, even though it was setting itself up to lose that money on bad loans, but that only delayed the crash by months. I think any sane government today is making plans with alternatives to the US for investing, and the existence of those alternatives will help smooth the way for moving from step 2 to 3 above.

We're not there yet - if the US crashes today, nations will suffer a lot - but as China increases its own wealth, develops its own markets, the impact of a US crash on China will be reduced, even in its strategic interest perhaps, and why would they continue to throw away money on our economy which offers little but, even without defaults, low returns/inflation coming up, much worse than the better uses they have for it?

Note Warren Buffet the last couple years saying for the first time, he's getting into foreign currencies... that got him a 17% return since Jan 2007 on the Euro alone.