What would happen if all the foreign countries that own most of our debt decided to call it in?
The end of America as we know it?
It’s a symbiotic relationship Reeder and you know it. If the US economy takes a crash, who is going to import and consume the goods that those foreign nations produce?
Better suited for GD-your post smells of troll.
Most likely the end of the world as we know it. America consumes more of the world’s resources than anyone else (at least until the Chinese get their consumer based economy really rolling), so if we go down, everybody is else is really going to be hurting as well. That’s one of the reasons why foreign countries buy our debt, they know that their economic survival depends on the US spending money like drunken sailors.
When you borrow $10,000 from the bank, the bank owns you.
When you borrow $10,000,000 from the bank, you own the bank.
Your attack does not belong in this forum.
It was a serious question.
And you are calling me a troll?
That’s scary.
What brought this up is Japan is making waves in that direction.
Well, officially, the US GDP in 2004 is about $11 trillion, and the debt is 62.4% of that or just under $6.8 trillion. With annual government revenues of $1.7 trillion, I’d say you’d fall a bit short of being able to pay your debts. So the short answer is that there is absolutely no way the US could actually pay the debts.
(http://www.cia.gov/cia/publications/factbook/geos/us.html)
So then what do we do? Well, its happened before with a number of less powerful economies and some of the solutions they have come up with are to (1)roll the loans over for another decade or five, or (2) let the IMF start making up rules for the economy. Nobody ever actually defaults on these loans. But, since the US effectively owns the IMF, they are unlikely to be subject to any rules, leaving us with the option of rolling over the loans.
As was pointed out earlier, it is in nobody’s interests to just let the US economy declare bankrupcy and collapse.
There’s an error in your thinking, Reeder.
Bondholders can’t suddenly demand payment on Bonds. Since bonds are for a fixed term there’s no means by which to extract payment prior to the bonds maturation date. Well and good.
What they COULD do is refuse to buy any more bonds and therefore put the federal government in a position of choosing to end deficit spending or deflate the currency or raise the rates on T-Bills to make them more attractive (thus bringing down the market a bit and increasing interest payments on the deficit).
It’s not pretty in any direction.
Japan may be making waves in that directions (as might be the PRC) but it’s not out of any ‘calling the debt in’ thing but more of a ‘we can’t afford to keep buying them’ thing. When balance of payments get out of whack for long enough eventually market forces will assert themselves and the dollar will seek to reach an equilibrium point with other currencies.
How would they call in the debt?
The US debt is generally in things like T bills. There is a defined payment scheme associated with these T bills. Owners of T bills can’t just ask for it to be paid back ahead of schedule.
Domo arigato, Mr. Robah-to. Domo…Domo…*
Couldn’t help myself.
Would selling off dollars be the same thing?
Bond issues are not bank loans and cannot be “called in,” except in some cases, by the issuer. Foreigners could choose to sell current US bond holdings and/or stop buying new issues but they can’t show up at the treasury and demand present value.
Here’s a question: How much is the US debt taking out of their economy? Yeah, sure, some of that money makes it’s way back to Japan and other nations that buy T-bills, but not all of it does, and it takes time for that to happen. Whereas if they just “dumped” that money in their economy, the effect would be nearly instantaneous by comparison.
Nope. Selling off dollars means that you think the value of the dollar is going to go down, be it from inflation, economic collapse, or whatever. It’s effect on the US economy is slower and has little to do with the US being able to maintain it’s debt load in comparison to the purchase of T-bills.
I disagree. I think it’s a very legitimate query that was worded properly for the forum. But then I’m not a Moderator, nor do I pretend to be one.
~
What Jonathan Chance said is my understanding of it as well, Reeder. In addition to that, one has to look at how much of the debt is held outside of the US, versus how much is held within the US, by US entities. Unless you’re asking what would happen if everyone tried to call in the debt at once, not just other countries.
Our debt is huge, but not ruinous. By odd coincidence, see the John Law/Mississippi Scheme abridgement I posted at my place just yesterday for an example of true debt mis-management.
The value of the dollar is at an all time low. Or pretty close anyway.
Wouldn’t it behoove those that own the bonds to ditch them ever how they could?
Only if they thought the US economy was a total goner. Europe takes a nose dive or China’s effort at switching to a capitalistic economy suddenly goes horribly wrong, and the dollar will rocket back in no time.
Easily better suited to any forum rather than GQ.
So, moved to GD.
samclem GQ moderator
On the contrary. The time to dump US-denominated bonds was when the currency was up. If one thinks the dollar is going to slide a lot more from here, one still might want to sell, but you have to remember that when we’re talking about this kind of money, one wants to be an investor, not a trader. So if you think in the long term the dollar will be at these levels or higher, one would be a buyer. Indeed, indirect bidders (which include foreign banks) set a record for accepted bids in today’s 5-year auction. It seems foreign banks are smart and want to buy low, contrary to some worries. To be fair, the worries aren’t without basis and could still come to pass.
As to your original question: As noted, no one can “call in” US debt. Each piece is sold with a particular maturity, and the government doesn’t have to pay the principal until then.
What could foreigners do? Well, they could slow net purchases to a crawl, they could even not buy any more at all and wait for their current bonds to mature, or they could become net sellers.
Any of these wouldn’t directly affect the government’s debt repayment schedule, but it would probably have the effect of increasing its costs – moving the market from having more buyers than sellers to more sellers than buyers would of course send prices down and yields up. The increased yields would percolate through the system, driving up costs for private borrowers, too. Which, in turn, could slow growth or even push the economy into recession.
Maybe.
A lot depends on where the money goes. If they put their excess cash into other US-denominated assets, say the stock market, prices there would rise and become less attractive. That might induce American accounts which might otherwise buy bonds to see treasuries as an attractive alternative. Then the thing would just wash through the system with little dislocation.
If they put the money into non-dollar denominated assets, interest rates in the US will almost certainly rise, as discussed. But then someone else might find the new rates attractive – it’s too difficult to say exactly how far rates would rise in such a scenario. Complicating things is that a reduced rate of foreign investment in dollar-denominated assets would increase the dollar’s decline. This is a disaster for small economies. It’s not exactly a great thing for big economies like ours, but it’s not as bad because it would make American products more competitive on world markets – exports would increase and perhaps imports would decrease.
So to sum up, the answer is a big fat “nobody knows.” That said, it’s fair to characterize the doomsday scenarios as outliers and not likely under most circumstances.
Ahhh, first it was “calling in the bonds” :dubious: .
Then you want to know about selling US $.
Then, counties ditching bonds them “ever how they could.”
So, which is it? The subject line is misleading, in any event.