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U.S. Debt to China (The Good & The Bad)
Transcript of U.S. Debt to China (The Good & The Bad)
Looking U.S Debt Crisis in Context:
What will happen if US defaults?
- World stock markets will plunge and global interest rates will rise.
- Shaking investment confidence around the world and stunting economic growth
- US bonds will become less valuable and investors will demand the government to pay higher interest rates
While the consequences of a default are terrible, many experts believe it will not happen.
What can the US do to improve it's current situation?
Debt to GDP ratio:
The ratio of a country's national debt to its gross domestic product (GDP).
Indicates the country's ability to pay back debt
Why is it bad for the US?
Changing economic balance of power in China's favor
China has "political leverage" over U.S.
can threaten to sell part of its debt holdings this would lead to rise in interest rates, slows U.S. economic growth, and could lead to potential crisis
Why is it bad for the U.S?
China has requested to replace dollar as current global currency
When value of dollar drops the debt China holds is worth less
The problem: US wealth is not rising as fast as its foreign debt
Why is it bad for the US?
Country's wealth= net foreign assets and human and capital stock
Borrowing is not concerning
country borrows and uses that to increase its physical and human capital
Borrowing is concerning
country borrows and uses that to finance current consumption spending
"The deterioration of the U.S. net foreign asset position was not followed by an increase in rates of human or physical capital formation."
worrisome but will not lead to "immediate" crisis
Why does the U.S owe so much?
First a little info
-China keeps yuan(chinese currency) at a fixed rate compared to basket currency
- Economic strategy to keep export prices competitive-
- The market in US government bonds and notes is the most liquid market in government rated securities
- foreign central banks with large currency reserves invest excess liquidity in US government securities -makes the US$ the world's reserve currency.
Why does US owe so much?
-China is the largest investor in public debt
-Currently China has 60% of currency reserves invested in U.S assets
-U.S treasuries still the better option
- U.S has never defaulted
Why is Selling Debt Good for the US?
1) Selling debt to China funds Federal programs
- Selling debt leads to an influx of money
- More money allows the US Government to spend more on Federal programs like construction projects
- The more federal programs there are, the more jobs there are available to American citizens
- Creation of jobs spurs economic growth
2) Selling debt allows American people to enjoy low consumer prices
- The Chinese keep the Yuan weaker than the US dollar
- This allows products exported from China to be cheaper than US products
- The low-cost Chinese imports and technology improvements have kept prices down for the last decade
U.S. Debt to China
(The Good & The Bad)
2) American people enjoy low consumer prices
Johnny De La Cruz
3) Selling debt keeps US interest rates low
Why do we owe so much capital?
How can it be bad for the US?
How can it be good for the US?
What can the US do differently?
A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.
U.S Current Debt to GDP ratio:
Spending more than we can produce.
- Bond prices and interest rates vary inversely
- One way China purchases debt from the US is by purchasing bonds
- Chinese demand for bonds keeps bond prices high
- High bond prices keeps interest rates low
- Low interest rates make business loans more profitable, which encourages business expansion and the creation of more jobs
Why does the U.S owe so much?
Seek ways to lower debt-to-GPA ratio
Consider restructuring alternatives: Before moving to debt restructuring, the US should examine its economic policies to see what srot of adjustments can be made to allow them to resume loan payments.
Approach China to discuss repayment options. Creates transparency between China and the US
- Government spending
- Net Exports
Correlation to Class
How it works.
1)Yuan is always at a fixed price
-U.S dollar falls - they use the extra currrency to purchase U.S dollars
-increases the demand for Dollars
-result increases value of dollars
China promises to redeem Dollars for Yuan at fixed rate
Topic 11 - The U.S. Trade Deficit
The U.S. Trade Deficit is the counterpart to low U.S. savings.
Consumption in the U.S. has been growing faster than U.S. income in the last decade.
US Benefits from Selling Debt
1) Funds Federal Programs
2) Keeps consumer prices low
3) Keeps interest rates low
Landler, Mark. "Seeing Its Own Money at Risk, China Rails at U.S." The New York Times. The New York Times, 15 Oct. 2013. Web. 18 Oct. 2014.
How much do we really owe?
U.S. Debt to China is hovering around $1.3 Trillion.
Why is it bad for the U.S.?
"That does not mean a brush with default will not have long-term damaging consequences for the United States. Even if China continues to buy Treasury bonds, economists said, it may opt for those with shorter maturities, which would drive up long-term interest rates in the United States, hurting home buyers and owners of small businesses." (NY Times)