Writing at Forbes Gordon Chang has a post that I wish that more people would read. In it he analyzes what would happen if China suddenly sold its U. S. Treasuries. His answer is simple but, sadly, eludes most people: nothing.
Writing at Forbes Gordon Chang has a post that I wish that more people would read. In it he analyzes what would happen if China suddenly sold its U. S. Treasuries. His answer is simple but, sadly, eludes most people: nothing.
“After all, the combined value of U.S. private and public debt securities dwarfs Beijing’s holdings.”
For those interested, see The TRUTH About Who Really Owns All Of America’s Debt.
IMHO, Chang gets close, but sam’s citation is just flat damned wrong.
Chang cites currency issues and past alternative asset purchase opportunities as throttles to Treasury dumping. That’s fine and true as far as it goes. But think like a banker, Credit 101, once the money is wired out the door your credit decision has been made. As a cash flow lender, you are, pardon my French, fucked, unless you intend to move on enterprise value or hard collateral. Last time I looked, Barack Obama wasn’t signing personal guarantees. The Chinese are stuck, because, well, they are stuck. The relevant analysis is what will be their posture on future purchases.
As for debt ceilings, has anyone considered that the government brings in enough money to service interest? We roll our debt principal………..perpetually. Until no one buys it, there is no “default.”
As for sam’s citation, this is the biggest canard going. “We owe the debt to ourselves.” Balls. Personalize it, people. So sam’s wife goes out and buys 2 boats, two homes, a two week trip to Paris and runs up a $100K credit card bill, all on her “credit.” She pays it all on the canard of the full faith and “credit” of sam, to whom she has even issued a promissory note. Says sam and his wife – “It doesn’t matter, we owe it to ourselves.” Problem is, sam ain’t got that kinda dough.
Now replace sam’s wife with the US government, sam with the SS Trust fund or the Fed, and think who REALLY is the ultimate creditor. sam?? sam’s wife?? Nope. The general taxpayer, foreign entities, or future generations. “Ourself” my ass.
BTW – I don’t believe in perpetual motion machines either…….
Governments are not households. In your example sam is the Federal Reserve and his wife is the Treasury. His wife spends $100,000 beyond her revenues and issues securities she sells to a bank which is required by law to purchase them. The bank borrows the reserves it needs from sam, who has the only legal printing press for dollars in his basement. Sam credits the bank’s reserve account, which is on a hard drive also located in his basement. The borrowed reserves are then placed in his wife’s Spouse General Account and her spending is “funded”.
Sixty years ago this sort of thing was a matter of public record.
I know, Ben, what you believe. But governments are in fact households. There is no free lunch. There is only the ability to hide or spread the pain or delay the pain or diminished credit to disparate entities. That is what you say and advocate. Its a perpetual motion machine only as long as people believe in perpetual motion machines.
If your worldview in fact held, I have some questions.
Why is there poverty? Or bad roads? Or unemployment. Just have governments print the money and make everyone a millionaire. Steak, crab legs and lobster for everyone. Flat screen TV’s, Hawaiian vacations……..after all, its just a printing press operation? What kind of evil people are we that we don’t just crank up the magic money machine to its limits and make everyone happy? And if it is a problem, where do you draw the line?
Take that to the limit. Why doesn’t the US fund Africa?
Its all bull, Ben. There is no free beer. We are attempting to believe it so, but there is none.