Becker Blog

The world according to Brian Becker

How much does the National Debt really matter?

Posted by Brian Becker on February 14, 2009

I was watching a recent speech by Nobel prize winning economist Paul Krugman on earier (awesome site btw). During the Q&A portion, he was asked how the United States can remain sovereign with how much we are beholden to other nations (specifically China) to finance our government debt. This is something I’ve thought about a lot but since I’m not an economist I never really knew the answer to. He quoted the old adage “If you owe the bank a thousand dollars, you have a problem, but if you owe the bank a million dollars, the bank has a problem,” and it made me think of our relationship with out debt financiers a bit differently than I had before. Its not entirely clear who has the upper hand in this relationship.

If you think about it, China has as much to lose as we do financially if the American economy tanks for a few reasons. If our dollar devalues, they are losing money are their investment because they are holding so many of our dollars, and if American’s consumption drops off a cliff as it has begun to do as the recession deepens, China’s own economy will suffer as people will be laid off due to lower revenue streams for their manufacturers. The USA needs China to make our crap, and China needs the USA to buy their crap. Its an interesting trade relationship.

I always kind of knew this part, but as Krugman explains, most countries have a debt as large as ours with regard to the size of their own economies. Not in real numbers of course, but our economy is much larger than say, France, so you can’t realistically compare them that way. Similarly, our ability to pay off that debt is so much greater because we have a much larger tax base than most countries of the world. I didn’t know that, and put into that perspective, it almost seems like the debt hardly matters at all.

One other thing that got me thinking about this was the news earlier in the week that said China has stated that they will keep buying US treasuries despite the fact that they know that the dollar is going to devalue. Here’s the exact quote from the article in the Financial Times:

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends towards the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

That was the director-general at the China Banking Regulatory Commission, which is the person that makes these kinds of decisions. Notice where he says “We hate you guys.”? China has no other choice but to finance our debt right now. Even if they wanted to stop, they couldn’t without devastating consequences in their own economy.

Sure its woefully irresponsible to be creating so much debt, but at this point we owe the bank a million dollars. The bank has a problem.


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