RS writes via email:
Last night on The Daily Show, Jon Stewart was joking about the debt limit debate and cracked that we’re so worried about the federal government being unable to pay its bills that we have to park it around the corner so that the Chinese don’t repossess it. Joking aside, this highlights a misconception among the public: that federal debt, particularly foreign ownership of foreign debt, is bad because foreign countries can use it as leverage to take over the U.S. I think this confusion arises because most people fail to realize the fundamental difference between personal debt and government debt. Most individuals who have debt have secured debt, that is that the loan they got to buy their car or house is backed up by the car or house itself. If the individual doesn’t pay, the asset gets repossessed. Government debt, on the other hand, is secured only by the promise that the government will pay when it promises to. People who buy debt in the form of U.S. Treasuries are not buying an ownership interest in the U.S. All they get is a promise. So the Chinese can never cash in their holdings in Treasures by repossessing parts of the U.S. But there seems to be paranoia, particularly on the right and from organizations like the Peter G. Peterson foundation, that the U.S. government’s debt opens us up to weakness because of the idea that debt holders are buying up U.S. debt in order to take over the country. This misconception is based on a fundamental confusion between personal secured debt and government bonds.
Yessir. Of course if Vietnam owes China a lot of money and tries to default, China could try to invade and get paid. But that’s just another way of saying that large states can use military coercion against small ones. A country doesn’t need to be indebted to find itself invaded by a superpower. Just ask Saddam Hussein.
It’s important to understand that Chinese purchases of American debt aren’t an equity stake in the United States. And they’re not an act of charity, either. They’re a roundabout way of taxing Chinese farmers, pensioners, and service sector workers in order to subsidize the export sector. Some Americans benefit from this, other Americans suffer, but given the paralysis in congress and the FOMC, it seems clear at this point that we would benefit on net from them buying less debt.