Updating Your Holiday Card Address Book
Actually, the truth of the matter is other countries finance US debt and would themselves be richer if they simply stopped buying US treasuries or pegging their currencies to the USD. This in turn would force domestic interest rates across the board to increase and as a result, Americans would have to cut consumption and save substantially more than they do now. And in the long-run this could make the US as a whole, rich again (or at least not broke).
Right now consumption is being funded by artificially cheap credit which is financed in large part by foreign banks, sovereign wealth funds and the FOMC. Still the same, a provocative illustration, especially when one realizes that three decades ago, the US was the largest creditor nation and today is the largest debtor nation. Quite a swing.
And for those that are interested, the flags on the sleeve represent Japan, the PRC and Russia, who currently hold more than $1.1 trillion of US treasury securities. Be sure to also thank them for buying toxic paper, like MBSs from FRE and FNM, to prop up your home equity.
See also: Live It Up, the Dollar is Dead?
Comments (1)
Ryan
So, are the current circumstances causing us to consume more of our capital than would otherwise be consumed? Perhaps that's a poor description of what I mean. We know that a lower than normal rate of interest subsidizes consumption at the expense of investment, ie. the lengthening of the structure of production (see. Bohm-Bawerk, Mises, Hayek, Garrison, Skousen, etc). It is possible that these policies are artificially limiting the amount of investment--and therefore economic growth--that would have occured otherwise, and this does not necessarily imply that we are consuming our capital, it just means that we may not be creating new capital at as fast a rate as would occur in an otherwise completely free market. The rate of capital creation is lower due to the artificially low interest rate. If I am misunderstanding and this is not the case, then I see no real reason for concern. Why should this be alarming?
Published: August 12, 2008 3:17 PM