Tuesday, December 7, 2010
Debate regarding a "danger level" of debt
Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. Above 90 percent, median growth rates fall one percent, and average growth falls considerably more. In addition, for emerging markets, there appears to be a more stringent threshold for total external debt/GDP; when external debt reaches 60 percent of GDP, annual growth declines by about two percent and for higher levels, growth rates are roughly cut in half. Seldom do countries simply 'grow' their way out of deep debt burdens.Economist Paul Krugman disputed the existence of a solid debt threshold or danger level, arguing that low growth causes high debt rather than the other way around.[90] He also points out that in Europe, Japan, and the US this has been the case. In the US the only period of debt over 90% of GDP was after World War II when "when real GDP was falling, not because of debt problems, but because wartime mobilization was winding down and Rosie the Riveter was becoming a suburban housewife."[91] Fed Chair Ben Bernanke stated in April 2010:[92]
Neither experience nor economic theory clearly indicates the threshold at which government debt begins to endanger prosperity and economic stability. But given the significant costs and risks associated with a rapidly rising federal debt, our nation should soon put in place a credible plan for reducing deficits to sustainable levels over time.There is also a second debate regarding whether debt held by the public (a lower amount) or gross debt (a larger amount) is the appropriate measure to use in evaluating the debt burden, measured as a percent of GDP. Krugman argued in May 2010 that the debt held by the public is the right measure to use, while Reinhart has testified to the President's Fiscal Reform Commission that gross debt is the right figure. Certain members of the Commission are focusing on gross debt.[90] The Center on Budget and Policy Priorities (CBPP) cited research by several economists supporting the use of the lower debt held by the public figure as a more accurate measure of the debt burden, disagreeing with these Commission members.[93]
This second debate relates to the economic nature of the intragovernmental debt that represents the difference between the two debt figures. As of April 30, 2010 the public debt was $8.4 trillion (59% GDP) and the gross debt was $12.9 trillion (90% of GDP), using a $14.3 trillion GDP estimate. The difference is the $4.5 trillion intra-governmental debt, mainly represented by the Social Security Trust Fund.[94]
For example, the CBPP argues:[93]
Debt held by the public is important because it reflects the extent to which the government goes into private credit markets to borrow. Such borrowing draws on private national saving and international saving, and therefore competes with investment in the nongovernmental sector (for factories and equipment, research and development, housing, and so forth). Large increases in such borrowing can also push up interest rates and increase the amount of future interest payments the federal government must make to lenders outside of the United States, which reduces Americans’ income. By contrast, intragovernmental debt (the other component of the gross debt) has no such effects because it is simply money the federal government owes (and pays interest on) to itself.Current projections indicate the lower debt held by the public figure will hit 90% of GDP by 2020.[95]
United States Debt ceiling
The National Debt Clock in late 2009
The Second Liberty Bond Act of 1917 established a statutory limit on federal debt.[96] Congress had previously approved each debt issuance separately. The debt limit provided the U.S. Treasury with more leeway in the administration of debt, allowing for modern management techniques in government finance.
The U.S. Treasury Department now conducts more than 200 sales of debt by auction every year. The Treasury has been granted authority by Congress to issue such debt as was needed to fund government operations as long as the total debt (excepting some small special classes) does not exceed a stated ceiling.
The most recent increase in the U.S. debt ceiling to $14.3 trillion by H.J.Res. 45 was signed into law on February 12, 2010.[97]
| Date | Debt Ceiling | Change in Debt Ceiling |
|---|---|---|
| June 25, 1940 | $49,000,000,000 [98] | |
| February 19, 1941 | $65,000,000,000 | $16,000,000,000 |
| March 28, 1942 | $125,000,000,000 | $60,000,000,000 |
| April 11, 1943 | $210,000,000,000 | $85,000,000,000 |
| June 9, 1944 | $260,000,000,000 | $50,000,000,000 |
| April 3, 1945 | $300,000,000,000 | $40,000,000,000 |
| June 26, 1946 | $275,000,000,000 | -$25,000,000,000 |
| August 28, 1954 | $281,000,000,000 | $6,000,000,000 |
| July 9, 1956 | $275,000,000,000 | -$6,000,000,000 |
| February 26, 1958 | $280,000,000,000 | $5,000,000,000 |
| September 2, 1958 | $288,000,000,000 | $8,000,000,000 |
| June 30, 1959 | $295,000,000,000 | $7,000,000,000 |
| June 30, 1960 | $293,000,000,000 | -$2,000,000,000 |
| June 30, 1961 | $298,000,000,000 [99] | $5,000,000,000 |
| July 1, 1962 | $308,000,000,000 | $10,000,000,000 |
| March 31, 1963 | $305,000,000,000 | -$3,000,000,000 |
| June 25, 1963 | $300,000,000,000 | -$5,000,000,000 |
| June 30, 1963 | $307,000,000,000 | $7,000,000,000 |
| August 31, 1963 | $309,000,000,000 | $2,000,000,000 |
| November 26, 1963 | $315,000,000,000 | $6,000,000,000 |
| June 29, 1964 | $324,000,000,000 | $9,000,000,000 |
| June 24, 1965 | $328,000,000,000 | $4,000,000,000 |
| June 24, 1966 | $330,000,000,000 | $2,000,000,000 |
| March 2, 1967 | $336,000,000,000 | $6,000,000,000 |
| June 30, 1967 | $358,000,000,000 | $22,000,000,000 |
| June 1, 1968 | $365,000,000,000 | $7,000,000,000 |
| April 7, 1969 | $377,000,000,000 | $12,000,000,000 |
| June 30, 1970 | $395,000,000,000 | $18,000,000,000 |
| March 17, 1971 | $430,000,000,000 | $35,000,000,000 |
| March 15, 1972 | $450,000,000,000 [100] | $20,000,000,000 |
| October 27, 1972 | $465,000,000,000 | $15,000,000,000 |
| June 30, 1974 | $495,000,000,000 | $30,000,000,000 |
| February 19, 1975 | $577,000,000,000 | $82,000,000,000 |
| November 14, 1975 | $595,000,000,000 | $18,000,000,000 |
| March 15, 1976 | $627,000,000,000 | $32,000,000,000 |
| June 30, 1976 | $636,000,000,000 | $9,000,000,000 |
| September 30, 1976 | $682,000,000,000 | $46,000,000,000 |
| April 1, 1977 | $700,000,000,000 | $18,000,000,000 |
| October 4, 1977 | $752,000,000,000 | $52,000,000,000 |
| August 3, 1978 | $798,000,000,000 | $46,000,000,000 |
| April 2, 1979 | $830,000,000,000 | $32,000,000,000 |
| September 29, 1979 | $879,000,000,000 [101] | $49,000,000,000 |
| June 28, 1980 | $925,000,000,000 | $46,000,000,000 |
| December 19, 1980 | $935,000,000,000 | $10,000,000,000 |
| February 7, 1981 | $985,000,000,000 | $50,000,000,000 |
| September 30, 1981 | $1,079,000,000,000 | $94,000,000,000 |
| June 28, 1982 | $1,143,000,000,000 | $64,000,000,000 |
| September 30, 1982 | $1,290,200,000,000 | $147,200,000,000 |
| May 26, 1983 | $1,389,000,000,000 | $98,800,000,000 |
| November 21, 1983 | $1,490,000,000,000 | $101,000,000,000 |
| May 25, 1984 | $1,520,000,000,000 | $30,000,000,000 |
| June 6, 1984 | $1,573,000,000,000 | $53,000,000,000 |
| October 13, 1984 | $1,823,000,000,000 | $250,000,000,000 |
| November 14, 1985 | $1,903,800,000,000 | $80,800,000,000 |
| December 12, 1985 | $2,078,700,000,000 | $174,900,000,000 |
| August 21, 1986 | $2,111,000,000,000 | $32,300,000,000 |
| October 21, 1986 | $2,300,000,000,000 | $189,000,000,000 |
| May 15, 1987 | $2,320,000,000,000 [102] | $20,000,000,000 |
| August 10, 1987 | $2,352,000,000,000 | $32,000,000,000 |
| September 29, 1987 | $2,800,000,000,000 | $448,000,000,000 |
| August 7, 1989 | $2,870,000,000,000 | $70,000,000,000 |
| November 8, 1989 | $3,122,700,000,000 | $252,700,000,000 |
| August 9, 1990 | $3,195,000,000,000 | $72,300,000,000 |
| October 28, 1990 | $3,230,000,000,000 | $35,000,000,000 |
| November 5, 1990 | $4,145,000,000,000 | $915,000,000,000 |
| April 6, 1993 | $4,370,000,000,000 | $225,000,000,000 |
| August 10, 1993 | $4,900,000,000,000 | $530,000,000,000 |
| March 29, 1996 | $5,500,000,000,000 | $600,000,000,000 |
| August 5, 1997 | $5,950,000,000,000 | $450,000,000,000 |
| June 11, 2002 | $6,400,000,000,000 [103] | $450,000,000,000 |
| May 27, 2003 | $7,384,000,000,000 [104] | $984,000,000,000 |
| November 16, 2004 | $8,184,000,000,000 [105] | $800,000,000,000 |
| March 20, 2006 | $8,965,000,000,000 [106] | $781,000,000,000 |
| September 29, 2007 | $9,815,000,000,000 [107] | $850,000,000,000 |
| June 5, 2008 | $10,615,000,000,000 [108] | $800,000,000,000 |
| October 3, 2008 | $11,315,000,000,000 [109] | $700,000,000,000 |
| February 17, 2009 | $12,104,000,000,000 [110] | $789,000,000,000 |
| December 24, 2009 | $12,394,000,000,000 [111] | $290,000,000,000 |
| February 12, 2010 | $14,294,000,000,000 [112] | $1,900,000,000,000 |
Foreign ownership of Our Debt
In total, lenders from Japan and China held 44% of the foreign-owned debt.[24] This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a recent report issued by the Bank of International Settlements, which stated, "'Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely."[25]
On May 20, 2007, Kuwait discontinued pegging its currency exclusively to the dollar, preferring to use the dollar in a basket of currencies.[26] Syria made a similar announcement on June 4, 2007.[27] In September 2009 China, India and Russia said they were interested in buying IMF gold to diversify their dollar-denominated securities.[28] However, in July 2010 China's State Administration of Foreign Exchange "ruled out the option of dumping its vast holdings of US Treasury securities" and said gold "cannot become a main channel for investing our foreign exchange reserves" because the market for gold is too small and prices are too volatile.[29]
The following is a list of the Foreign Owners of U.S. Treasury Securities as listed by the U.S. Treasury:[24]
| Leading Foreign owners of US Treasury Securities (July 2010) | ||
|---|---|---|
| Nation/Territory | billions of dollars | percentage |
| People's Republic of China (mainland) | 846.7 | 20.8 |
| Japan | 821.0 | 20.2 |
| United Kingdom | 374.3 | 9.2 |
| Oil exporters1 | 223.8 | 5.5 |
| Caribbean Banking Centers2 | 150.7 | 3.7 |
| Brazil | 162.2 | 4.0 |
| Hong Kong (Special Administrative Region) | 135.2 | 3.3 |
| Russia | 130.9 | 3.2 |
| Republic of China (Taiwan) | 130.5 | 3.2 |
| Grand Total | 4065.8 | 100 |
2Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, British Virgin Islands and Panama
China holds more U.S. debt than indicated
This was written back in March , so the numbers are constantly changing. The following three articles are From Wikipedia, the free encyclopedia 'United States public debt'
**FILE** U.S. Treasury Secretary Timothy Geithner (left) hosts a meeting of the U.S.-China Strategic and Economic Dialogue with China's Vice Premier Wang Qishan in July at the Treasury Department in Washington.
Despite recent government reports that China's holdings of U.S. Treasury debt declined during the second half of last year, the Asian economic giant almost certainly owns far more Treasury securities than official statistics indicate.
After peaking at $801.5 billion, China's holdings of U.S. Treasury securities declined to $755.4 billion at the year's end, dropping the communist power into the position of second-largest holder of Treasury debt after Japan's $768.8 billion, official government data reveal.
But these numbers don't tell the whole story.
"The U.S. Treasury data almost certainly understate Chinese holdings of our government debt because [the U.S. figures] do not reveal the ultimate country of ownership when [debt] instruments are held through an intermediary in another jurisdiction," Simon Johnson, an economics professor at the Massachusetts Institute of Technology, told the U.S.-China Economic and Security Review Commission, a bipartisan forum established by Congress in 2000 to monitor the security implications of the U.S. economic relationship with China.
Mr. Johnson told the commission last week that "a great deal" of last year's $170 billion increase in Treasury holdings by the United Kingdom "may be due to China placing offshore dollars in London-based banks" and then using the funds to purchase Treasury debt.
Mr. Johnson, a former chief economist for the International Monetary Fund, estimated that China owns about $1 trillion in U.S. Treasury securities, or nearly half the $2.37 trillion stock of Treasury debt held by "foreign official" owners.
The amount of U.S. debt held by China is even higher than that, said Eswar Prasad, an economist at Cornell University.
Under the widely held assumption that 70 percent of China's $2.4 trillion in foreign exchange reserves is invested in dollar-denominated bonds, Mr. Prasad told the commission that China probably holds about $1.7 trillion in U.S. government debt.
That would include the more than $400 billion in debt issued by U.S. government agencies, such as Fannie Mae and Freddie Mac, whose obligations are liabilities of the U.S. government, Mr. Prasad said.
Derek Scissors, a China scholar at the Heritage Foundation, described as "unusable" the official U.S. government data on foreign holdings of Treasury debt.
China's mercantilist policies generate "by far the world's largest balance of payment surpluses" and contributed to China's $453 billion increase in foreign exchange reserves last year — surpluses that "are too large to put anywhere other than the United States. No other country has financial markets capable of absorbing them," Mr. Scissors said.
But the economists at last week's hearing disagreed about how much leverage China's creditor status commands over the U.S.
Maj. Gen. Luo Yuan told China's state-run Outlook Weekly magazine last month, shortly after the U.S. detailed new arms sales to Taiwan, that China's "retaliation should not be restricted to merely military matters" but also should be "covering politics, military affairs, diplomacy and economics."
"We could sanction them using economic means, such as dumping some U.S. government bonds," Gen. Luo said.
Michael Wessel, a member of the U.S.-China commission, began the hearing by noting that China, whose economy expanded by 10.7 percent during 2009, "emerged from the global recession stronger than ever, expecting its status as America's banker to convey new political power."
"The United States government, with its fiscal and monetary tools constrained by the recession, cannot easily extricate itself from its growing financial dependence on China," he said.
Leverage, however, works both ways, Mr. Wessel suggested, when he quoted oil magnate J. Paul Getty. "If you owe the bank $100, that's your problem," Getty famously said. "If you owe the bank $100 million, that's the bank's problem."
Mr. Johnson also downplayed China's leverage.
"There is a perception that China's large dollar holdings confer upon that country some economic or political power vis-a-vis the United States," said Mr. Johnson, citing the view that Chinese reserves prevent the United States from pressuring China to increase the value of its currency, the yuan, also known as the renminbi. "This view is incorrect and completely misunderstands the situation."
Daniel Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University, compared today's financial situation between China and the U.S. to the Cold War nuclear situation between the Soviet Union and the U.S.
He argued that the "balance of terror," which was connected with the nuclear policy of mutually assured destruction adopted by both adversaries, proved to be "a source of stability."
Mr. Drezner approvingly cited the analogy of Lawrence H. Summers, President Obama's chief economic adviser, who earlier coined the phrase "the balance of financial terror" to describe the U.S.-China financial relationship. Such a scary balance, Mr. Drezner told the commission, is "a source of stability and a source of anxiety."
Economists generally agree that the yuan is 25 percent to 40 percent undervalued, in large part because Chinese authorities instruct the central bank to purchase massive amounts of dollars in order to peg the yuan's value to the dollar at a level much lower than it otherwise would be, Mr. Johnson said.
A bipartisan coalition in Congress wants the Treasury Department to label China a currency manipulator in its next report, due April 15. Such a designation would require the Treasury Department to begin negotiations with China to let its currency rise in value and reduce the massive U.S. trade deficit with China, which has exceeded $200 billion for each of the past five years.
Under legislation proposed in Congress, currency manipulation would be designated as an unfair trade subsidy and would let U.S. companies seek import duties on Chinese goods.
"China is obviously a currency manipulator and should be so labeled by the U.S. Treasury," Mr. Johnson said.
Mr. Johnson called Chinese threats to dump dollar-denominated assets a "paper tiger" and "at worst a bluff and at best a way to help the U.S. with a depreciation of the dollar."
Mr. Scissors agreed. "Until the Chinese government is willing to break its dependence on the dollar — which there is not the slightest indication it is willing to do — [China] is compelled to buy American bonds and lacks the flexibility to wield any influence," he said.
Mr. Johnson said the current U.S. economic situation ensures that a substantial downward movement in the dollar "would have no noticeable effect on inflation and therefore would not force the Federal Reserve to increase interest rates."
Mr. Prasad, however, noted that the damage to the two countries' economies would not be equal.
"Any Chinese threat to move aggressively out of Treasuries is a reasonably credible threat as the short-term costs to the Chinese of such an action are not likely to be large," he said.
Moreover, even though China's share of the financing of the soaring U.S. budget deficit has declined over time, its actions still could affect U.S. interest rates, Mr. Prasad said.
"Its actions could serve as a trigger around which nervous market sentiments could coalesce," Mr. Prasad said. "Given that there are no clear prospects of reining in exploding deficits and debt in the U.S.," he added, "changes in availability of deficit financing at the margin can have potentially large consequences."
Mr. Scissors estimated that U.S. interest rates would rise at most three percentage points.
However, with U.S. national debt set to exceed $14 trillion before the end of the year, a three-percentage-point increase in interest rates would raise the annual cost of paying interest on that debt by more than $400 billion.
The commission was told that U.S. policymakers also need to consider the geopolitical and national security implications of operating a fiscal policy that depends on China and other foreign creditors, who collectively hold 50 percent of U.S. publicly held debt.
Clyde Prestowitz, president of the Economic Strategy Institute, recalled for the commission Britain's experience with the United States in 1956 after Britain joined France and Israel in seizing the Suez Canal after Egypt's nationalization of the waterway.
"President Eisenhower was furious over the seizure of Suez and informed the Brits that America would ruin the pound sterling if Britain did not withdraw," Mr. Prestowitz said. "And that was the end of the seizure.
"Now, America is not Britain and China is not America," Mr. Prestowitz said. "But if that is how your friends can treat you when you owe them, it is not difficult to imagine that less-friendly states could be quite difficult in certain circumstances."
1 Comment
**FILE** U.S. Treasury Secretary Timothy Geithner (left) hosts a meeting of the U.S.-China Strategic and Economic Dialogue with China's Vice Premier Wang Qishan in July at the Treasury Department in Washington. Despite recent government reports that China's holdings of U.S. Treasury debt declined during the second half of last year, the Asian economic giant almost certainly owns far more Treasury securities than official statistics indicate.
After peaking at $801.5 billion, China's holdings of U.S. Treasury securities declined to $755.4 billion at the year's end, dropping the communist power into the position of second-largest holder of Treasury debt after Japan's $768.8 billion, official government data reveal.
But these numbers don't tell the whole story.
"The U.S. Treasury data almost certainly understate Chinese holdings of our government debt because [the U.S. figures] do not reveal the ultimate country of ownership when [debt] instruments are held through an intermediary in another jurisdiction," Simon Johnson, an economics professor at the Massachusetts Institute of Technology, told the U.S.-China Economic and Security Review Commission, a bipartisan forum established by Congress in 2000 to monitor the security implications of the U.S. economic relationship with China.
Mr. Johnson told the commission last week that "a great deal" of last year's $170 billion increase in Treasury holdings by the United Kingdom "may be due to China placing offshore dollars in London-based banks" and then using the funds to purchase Treasury debt.
Mr. Johnson, a former chief economist for the International Monetary Fund, estimated that China owns about $1 trillion in U.S. Treasury securities, or nearly half the $2.37 trillion stock of Treasury debt held by "foreign official" owners.
The amount of U.S. debt held by China is even higher than that, said Eswar Prasad, an economist at Cornell University.
Under the widely held assumption that 70 percent of China's $2.4 trillion in foreign exchange reserves is invested in dollar-denominated bonds, Mr. Prasad told the commission that China probably holds about $1.7 trillion in U.S. government debt.
That would include the more than $400 billion in debt issued by U.S. government agencies, such as Fannie Mae and Freddie Mac, whose obligations are liabilities of the U.S. government, Mr. Prasad said.
Derek Scissors, a China scholar at the Heritage Foundation, described as "unusable" the official U.S. government data on foreign holdings of Treasury debt.
China's mercantilist policies generate "by far the world's largest balance of payment surpluses" and contributed to China's $453 billion increase in foreign exchange reserves last year — surpluses that "are too large to put anywhere other than the United States. No other country has financial markets capable of absorbing them," Mr. Scissors said.
But the economists at last week's hearing disagreed about how much leverage China's creditor status commands over the U.S.
Maj. Gen. Luo Yuan told China's state-run Outlook Weekly magazine last month, shortly after the U.S. detailed new arms sales to Taiwan, that China's "retaliation should not be restricted to merely military matters" but also should be "covering politics, military affairs, diplomacy and economics."
"We could sanction them using economic means, such as dumping some U.S. government bonds," Gen. Luo said.
Michael Wessel, a member of the U.S.-China commission, began the hearing by noting that China, whose economy expanded by 10.7 percent during 2009, "emerged from the global recession stronger than ever, expecting its status as America's banker to convey new political power."
"The United States government, with its fiscal and monetary tools constrained by the recession, cannot easily extricate itself from its growing financial dependence on China," he said.
Leverage, however, works both ways, Mr. Wessel suggested, when he quoted oil magnate J. Paul Getty. "If you owe the bank $100, that's your problem," Getty famously said. "If you owe the bank $100 million, that's the bank's problem."
Mr. Johnson also downplayed China's leverage.
"There is a perception that China's large dollar holdings confer upon that country some economic or political power vis-a-vis the United States," said Mr. Johnson, citing the view that Chinese reserves prevent the United States from pressuring China to increase the value of its currency, the yuan, also known as the renminbi. "This view is incorrect and completely misunderstands the situation."
Daniel Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University, compared today's financial situation between China and the U.S. to the Cold War nuclear situation between the Soviet Union and the U.S.
He argued that the "balance of terror," which was connected with the nuclear policy of mutually assured destruction adopted by both adversaries, proved to be "a source of stability."
Mr. Drezner approvingly cited the analogy of Lawrence H. Summers, President Obama's chief economic adviser, who earlier coined the phrase "the balance of financial terror" to describe the U.S.-China financial relationship. Such a scary balance, Mr. Drezner told the commission, is "a source of stability and a source of anxiety."
Economists generally agree that the yuan is 25 percent to 40 percent undervalued, in large part because Chinese authorities instruct the central bank to purchase massive amounts of dollars in order to peg the yuan's value to the dollar at a level much lower than it otherwise would be, Mr. Johnson said.
A bipartisan coalition in Congress wants the Treasury Department to label China a currency manipulator in its next report, due April 15. Such a designation would require the Treasury Department to begin negotiations with China to let its currency rise in value and reduce the massive U.S. trade deficit with China, which has exceeded $200 billion for each of the past five years.
Under legislation proposed in Congress, currency manipulation would be designated as an unfair trade subsidy and would let U.S. companies seek import duties on Chinese goods.
"China is obviously a currency manipulator and should be so labeled by the U.S. Treasury," Mr. Johnson said.
Mr. Johnson called Chinese threats to dump dollar-denominated assets a "paper tiger" and "at worst a bluff and at best a way to help the U.S. with a depreciation of the dollar."
Mr. Scissors agreed. "Until the Chinese government is willing to break its dependence on the dollar — which there is not the slightest indication it is willing to do — [China] is compelled to buy American bonds and lacks the flexibility to wield any influence," he said.
Mr. Johnson said the current U.S. economic situation ensures that a substantial downward movement in the dollar "would have no noticeable effect on inflation and therefore would not force the Federal Reserve to increase interest rates."
Mr. Prasad, however, noted that the damage to the two countries' economies would not be equal.
"Any Chinese threat to move aggressively out of Treasuries is a reasonably credible threat as the short-term costs to the Chinese of such an action are not likely to be large," he said.
Moreover, even though China's share of the financing of the soaring U.S. budget deficit has declined over time, its actions still could affect U.S. interest rates, Mr. Prasad said.
"Its actions could serve as a trigger around which nervous market sentiments could coalesce," Mr. Prasad said. "Given that there are no clear prospects of reining in exploding deficits and debt in the U.S.," he added, "changes in availability of deficit financing at the margin can have potentially large consequences."
Mr. Scissors estimated that U.S. interest rates would rise at most three percentage points.
However, with U.S. national debt set to exceed $14 trillion before the end of the year, a three-percentage-point increase in interest rates would raise the annual cost of paying interest on that debt by more than $400 billion.
The commission was told that U.S. policymakers also need to consider the geopolitical and national security implications of operating a fiscal policy that depends on China and other foreign creditors, who collectively hold 50 percent of U.S. publicly held debt.
Clyde Prestowitz, president of the Economic Strategy Institute, recalled for the commission Britain's experience with the United States in 1956 after Britain joined France and Israel in seizing the Suez Canal after Egypt's nationalization of the waterway.
"President Eisenhower was furious over the seizure of Suez and informed the Brits that America would ruin the pound sterling if Britain did not withdraw," Mr. Prestowitz said. "And that was the end of the seizure.
"Now, America is not Britain and China is not America," Mr. Prestowitz said. "But if that is how your friends can treat you when you owe them, it is not difficult to imagine that less-friendly states could be quite difficult in certain circumstances."
1 Comment
New User 50bf0 says:
3 months, 1 week ago
American is not broke. China does not own the U.S. The Federal Reserve Bank is who owes the Chinese. The Federal Reserve Bank is a PRIVATE entity, which we TRUE American's have been trying to get rid of for decades. The Federal Reserve Bank can claim Bankruptcy anytime they want, and they probably will soon, as the Banking System will soon be ALLOWED to fail, as it should be. Then the ONLY thing America will need to do is start manufacturing OUR own products again, then "Happy Days Are here again!" We have the advantage because we have Natural Resources, which China does not. It's really so simple, it's stupid! K.I.S.S. America it's ALL GOOD!
Subscribe to:
Posts (Atom)