My knowledge of macroeconomics is quite poor, but it seems to me that countries like China would loan the US money so that we’ll keep buying their stuff. Obviously, that’s oversimplified.
But, the professor of my international business class said that one big reason China keeps buying our T-bills is because of the United States’ gold reserves.
What? Our debt to China alone is what, $2 trillion? The entire worth of US gold is supposedly a few hundred billion dollars at most. It’s not like we’ll pay our debt off in gold bullion, right? So why would countries consider our gold reserves when loaning us money?
(I know, I should have just asked the prof to explain, but everyone else seemed to agree and I certainly didn’t want to look like the dummy)
Despite what one side may say about the other, as far as country finances go the USA is in pretty good shape. They do need to smarten up in the next few years, but really - the tax rate in the USA is so much lower than even another solvent country like Germany; ditto the debt to GDp compared to much of Europe; the US will simply have to get over its “read-my-lips-no-new-tax” phobia, stop spending like drunken sailors, and getback to break-even. This requires cooperation and willpower. Guess what both sides of the debate lack?
Yeah, the gold reserves are essentially meaningless.
China buys T-Bills because they want to control their currency. Basically here’s how it works.
(1) You buy an iPad with dollars
(2) Apple pays their supplier in China in dollars
(3) The business in China changes their dollars for yuan
Now, what would normally happen is that (3) takes place on the open market. As more people want to change dollars for yuan, they will get less yuan for their dollar. In effect, this means those businesses don’t make as much money. Instead, in China the government makes them buy their yuan from the government. They do this so they can control the value of the yuan, and keep it artificially low. This keeps export businesses more competitive than they otherwise would be.
So now China has a bunch of dollars. Instead of having them sit and do nothing, they loan them to the U.S. government and earn some interest. But, you say, the U.S. is going bankrupt so they won’t get their money back! Well, that may be true, but if the U.S. goes bankrupt the dollar will become worthless, so there’s no real difference between T-Bills and cash. This is a simplification, but it is true.
Of course, one of the simplest reasons is that, compared to most other investments, loaning money to the US is very safe. There’s really no reason to think that it will default on its debt. In addition, it’s currency is very stable and inflation is well controlled. Simply put, it’s a safe place to invest. Another item to consider is that it is such a large pool of investments that you don’t have to worry about your own actions having too high of an impact on the market - if you need to buy or sell large amounts at once, you won’t be driving the market up or down on yourself.
I think you need to find a new international business professor. That is one dumb answer.
I think treis’ answer is basically correct, along with the perceived safety of the dollar, and it probably helps that oil trades using the dollar as well.
I think one of the confusing things is that when people apply the term “loan” to what China and the US is doing, some people tend to think of how a bank may loan money to a person or business. This leads to misconceptions that China can call in the loan and put the US is a bad situation.
The better term for China (or anyone else, seeing as how China holds less than 10% of US government debt) buying US bonds is really “investing.” The US issues bonds, the proceeds of which finance government spending; people, companies, or countries buy the bonds; and they get a financial instrument that earns interest. Yeah, it is kind of like a loan in that dollars go from China to the US and they get interest, but it is really more like an investment.
And the answer of why has been covered well in this thread: China has US dollars and US bonds are a very safe investment.
It’s a loan, but really a Tbill is a bond; pay X% per year/quarter, pay back balance $Y in Z years. So China cannot “call the loan” the way your banker can with you. A country will issue lots of these all the time, so every quarter there are a pile of these that come due.
What happened with Greece was that eventually they did not have enough cash/assets to pay the interest and pay back the bonds due that quarter. Either a big group (EU, IMF, World Bank) lends/gives you the money, or the debtors take less than 100 cents on the dollar, or they roll over the bond to a new one due later. Or all of the above…
The USA is nowhere near the point where it will hit that wall; IIRC, less than 5% of the money it spends is to service debt. It still has lots of wiggle room without destroying its economy.
IIRC, the gold in Fort Knox is irrelevant. Most countries got off the gold standard decades ago; none has a standing promise to trade their bills for solid gold, and given the volatility of gold, I sure wouldn’t want to be the one giving away an ounce of gold for $35 or some stupid link like that. There is not anwhere close to enough gold to cover the total US money supply, or any other country. The idea of shipping half Fort Know to China to cover the debt is so Third world/1800’s.
Greece doesn’t have the print more money option that the U.S. government does. If, at some point, the U.S. can’t raise money in the market, the Fed can just add a couple zeros to their Govt’s bank account, and everything will be paid. Of course, this course of action has it’s own problems. But theoretically, the U.S. should never be forced to default on their debts.
What loans that people get can the bank call? My car loans have a fixed payback schedule the bank cannot just up and decide they want the money now same with my house mortgage. Am I missing something?
Some bonds and commercial loans are callable at the option of the originator.
A power, I might note, which the Fed has not been shy about using of late. The Fed’s System Open Market Account, in which the Fed deposits Treasuries which it pays for by printing money, is currently at $2.6 trillion, up from a few hundred billion in 2008.
This has a huge impact on American external indebtedness. The US ratio of external debt to GDP is currently at 76%, lower than the UK (85%), Germany (78%), France (92%), or Spain (78%). If we had to raise that $2.6 trillion externally, our external debt ratio would rise to 93%, worse than any of the large European economies save Italy.
(Data from the Economist here; set clock to 2012.)
The European Central Bank buys European government bonds on a much more modest scale, and proposals to increase the amount are fraught with controversy since no one wants to subsidize anyone else’s borrowing.
I doubt that’s causing confusion among people who don’t understand the basics of the international bond market. Such loans aren’t something the average person encounters.
Usually, when you hear about a bank “calling in a loan”, it’s used to mean that the loan was on a short fixed term, but was being rolled over regularly into a new loan, and the bank didn’t want to write a new loan. Like in the 1920s when the standard mortgage was a 5-year with a balloon payment at the end.
Right, but the plan is to sell those T-Bills, not tear them up. So we aren’t really borrowing money here. The steps are:
(1) Print Money
(2) Buy T-Bills
(3) Sell T-Bills
(4) Destroy money
So we are more or less back where we started. The only thing that is happening is limiting the supply of T-Bills in order to put more money into the system.
It gets even weirder when you consider that China is only the second largest holder of US debt instruments (they might even the the third largest holder, as IIRC they were divesting themselves somewhat of US instruments, at least until the Euro started to look a bit flaky)…the American people are the largest holder of US ‘loans’. So, why do we keep ‘loaning’ money to ourselves??
ETA: I guess China is still number two, according to this.
A lot of personal loans can be called by the bank, IIRC. If they find you are laid off, they don’t need to wait until you are delinquent… It’s probably still buried in the fine print, especially in mortgages, you just don’t hear about the banks exercising this option nowadays. More commonly this happens with Deman Loans, which are as the name mlies, repayable on demand.
Yes, if a country has access to print its own money, like the USA or Agentina or Weimar Republi, then one option of getting rid of debt is to print money. Greece because of the euro is in the same boat as the states or cities in the USA - it cannot arbitraily create more money. When a country “prints” extra money, then the rest of the world values their currency less. You still pay your old age pensioners $50,000 a year, say, but now gas costs $30 a gallon and a loaf of bread costs $20. The market reduces real costs for you. It’s simpler than the politicians having to pass laws cutting all pensions and salaries in half, like Greece might have to do.
A. (Bolding mine) Doesn’t this mean at some point in the future there is going to be a large increase in the amount of t-bills the US needs to sell?
B. AFAIK the only reason the Fed is printing money is to stimulate the economy by increasing the money supply. Has anyone credible claimed they have another motive (IE - Monetizing the US debt)?
If the US is continuously paying off old bonds and buying new ones, then wouldn’t refusing to buy the new ones be effectively the same thing as ‘calling’ the loan?
Edit - Monetizing = printing money to pay off debt.
I would say that’s an open question. I would say it’s a good question. In the past the Fed has run down its stock of SOMA T-bills in times of expansion, but it has never built up the stock on anything like the massive scale of the past three years. Unloading $2.6 trillion (which will grow larger before QE is over) would be a problem, and would significantly increase the US gov’t external debt ratio. I suspect, but do not know, that the Fed will sit on much of that stock forever.
I haven’t seen that advanced as a motive, and I’m not sure I’d believe it if it was advanced. But regardless, there is no question that minimizing external debt is a fortuitous consequence of Quantitative Easing.
