Soaring federal government payments to foreign lenders

[Fade the Butcher]

More good news for America.

http://www.epi.org/content.cfm/webfeatures_snapshots_20060308

A few decades ago, economic textbooks downplayed the modest growth of federal government debt as something that "we owe to ourselves." At that time, virtually all interest payments by the federal government went to Americans. In recent years, however, the federal debt has become increasingly financed by foreign lenders, both governments and private investors. As a result, a rapidly rising share of our federal budget goes to interest payments to foreign lenders.

At the end of fiscal year 2001, the outstanding federal government debt totaled $3.3 trillion, 31% of it held by foreign lenders. Over the succeeding four years, the debt grew by $1.3 trillion, but borrowing from abroad accounted for more than 80% of the increase.

Using Congressional Budget Office (CBO) projections for different scenarios, the Center on Budget and Policy Priorities estimates that the federal debt will rise to $6.7 trillion by 2011 under current policies. If foreign lenders continue to buy 80% of new federal debt, the federal government will owe more than half—$3.8 trillion dollars—to foreign lenders by 2011, which is equivalent to 23% of expected gross domestic product that year.

http://www.epi.org/images/snap20060308.gif

Assuming that interest rates on federal debt remain as projected by the CBO (near 5%), we will be paying foreign lenders $181 billion in interest by 2011, up from $83 billion last fiscal year. That growth contrasts sharply with the trend in the president's budget for any non-defense discretionary spending program. For example, President Bush's budget calls for total spending on education, training, employment, and social services to remain at a flat $86 billion from 2007 through 2011. Because of inflation, that represents a 10% cut in real spending over four years. Because of rising enrollment, the cut per student or trainee would be even deeper than 10%.

[Dan Dare]

Thinker claims this is a wizard wheeze. He says America is pulling a fast one on the Chinese and the others by swapping worthless paper for all that neat stuff that they send us to shop for in the mall. Thinker believes that the Chinese will never pull the rug because it will hurt them more than it will hurt us. He doesn't think they will ever ask for real assets in payment instead of worthless paper notes. Thinker has invented a new branch of economics.

[Thinker]

Thinker claims this is a wizard wheeze. He says America is pulling a fast one on the Chinese and the others by swapping worthless paper for all that neat stuff that they send us to shop for in the mall. Thinker believes that the Chinese will never pull the rug because it will hurt them more than it will hurt us. He doesn't think they will ever ask for real assets in payment instead of worthless paper notes. Thinker has invented a new branch of economics.
Exactly what would the Chinese gain by pulling the rug?

[Dan Dare]

The freehold to the Presidio in San Francisco?

A controlling stake in Boeing?

The Rockefeller Center?

They're only limited by their imagination and the balance in their current account.

[Thinker]

The freehold to the Presidio in San Francisco?

A controlling stake in Boeing?

The Rockefeller Center?

They're only limited by their imagination and the balance in their current account.
I'm not sure I understood your first comment then.

What do you mean by "pulling the rug?"

If the Chinese suddenly demanded a controlling stake in Boeing as payment for all those made-in-China shoes, instead of just giving them a controlling stake in Boeing in exchange for some shoes, we would instead just stop buying shoes from them.

[Thinker]

In other words, imagine it this way:

Chinese: We don't think your paper money is worth anything anymore. Therefore we will not accept it. If you want to buy some shoes from us, we will need a controlling stake in Boeing instead.

Americans: OK then, we'll just not buy some shoes from you guys anymore. Take our currency, or take nothing.

Chinese: Hmmm, I see your point. OK, we'll continue to accept your currency.

[Dan Dare]

Yes I understand what you are saying, the Japanese started out the same way after WW II but they soon wised up and realised that American promissory notes are just that, notes. That's when they started to insist on real assets like MCA, Columbia, the Rockerfeller center and so on.

The EU, which also runs a trade surplus with the US, does not not care to hold financial assets demoninated in dollars and have long preferred that their deficit is funded by exchange of goods for real assets. The Chinese will develop the confidence to insist on the same at some point.

[Dan Dare]

Here, to provide some perspective, is a chart showing the historical trend of the level of foreign debt that the US has incurred, as a percentage of GDP both historically and projected to 2012.

http://img131.imageshack.us/img131/2302/acf3c6c5bs.gif (http://imageshack.us)


According to the Economic Policy Institute (http://www.epinet.org/content.cfm/Issuebrief203) the cost of servicing this foreign debt will increase to around 1.7% of GDP within less than ten years.

[Thinker]

Yes I understand what you are saying, the Japanese started out the same way after WW II but they soon wised up and realised that American promissory notes are just that, notes. That's when they started to insist on real assets like MCA, Columbia, the Rockerfeller center and so on.
They did not "insist on real assets," in exchange for their exports. Rather, they merely amassed wads of American dollars of foreign exchange, which, lacking anything else to do with it, decided to buy up American assets. This, it should be noted, is money flowing back into the US - an investment.

In many of those cases, the value of these assets tumbled in the early-90's recession (at least this was true for Rockefeller Center), so in many cases they lost money on the deal. But I digress.


The EU, which also runs a trade surplus with the US, does not not care to hold financial assets demoninated in dollars and have long preferred that their deficit is funded by exchange of goods for real assets. The Chinese will develop the confidence to insist on the same at some point.
The EU explanation is the same as the Japanese above. They're simply amassing US dollars in foreign exchange and have to do something with it. It's not much good stuffed under a mattress, so to speak.

The Chinese have already started buying some American assets (recall Lenovo), and are starting to invest money in the US elsewhere as well. Again, this is money flowing back into the US.

If the Chinese started spending lots of money in the US to build skyscrapers, shopping malls, buying companies, and so on, what is the threat here? Would they do this with the intention of destroying the US, or something? If their intentions were harmful, they would kill their biggest export market. Not only that, but all those American companies which build factories and stores in China would also be killed.

It is in their own best interest that they see a healthy US (and the rest of the world). Their economy depends on it.

[Dan Dare]

It is in their own best interest that they see a healthy US (and the rest of the world). Their economy depends on it.

I take it then you'd be fairly sanguine about the Chinese acquiring a controlling stake in Boeing?

[Thinker]

I take it then you'd be fairly sanguine about the Chinese acquiring a controlling stake in Boeing?
It would not be my preferred choice, but I don't think it would be harmful.

[Dan Dare]

It could easily happen. Boeing's market cap is "only" $ 60 billion, the Bank of China probably holds several times that amount in US government bonds.

[Thinker]

It could easily happen. Boeing's market cap is "only" $ 60 billion, the Bank of China probably holds several times that amount in US government bonds.
In the case of Boeing, I suspect that, if this were to happen, the Feds would require them to sell off Boeing's defense and space subsidiaries as a condition for having so much foreign control.