“Foreigners” are choosing to invest in long-term bonds issued by the United States of America. According to some ideologues on both the left and the right, this is supposed to be some kind of big, scary problem.
I’m sorry, I don’t buy the scary, emotional rhetoric. Why? Because I am one of an apparent minority who is not just happy—but delighted—that foreign investors with dollars to spare think the USA is the one of the safest, most stable places in the world to invest their money.
Ten (or so) years ago, Milton Friedman explained it this way:
It is a mystery to me why... it is regarded as a sign of Japanese strength and American weakness that the Japanese find it more attractive to invest in the U.S. than Japan. Surely it is precisely the reverse - a sign of U.S. strength and Japanese weakness.
[When I added that quote to my favorite quotes file, I neglected to record the source book or article. Dopey me. Trust me though, I didn't make it up.]
A beautiful friendship: Why “foreigners” buy T-bonds
When a “foreigner” buys a US Treasury bond, that person is in effect saying:
“Uncle Sam, here’s a little loan. I’ll trust you to keep inflation under control instead of allowing it to cheat me out of my principal. I’ll also trust you to continue growing your economy (and therefore your tax receipts, which are 17% of the size of your economy) at least enough to cover the interest you promised to pay me. True, your interest payments will grow; but so will your tax receipts, and that means your interest payments should safely stay right around 10 percent of your tax receipts. And if you fulfill the trust I’m placing in you, guess what I’ll do when the time comes for you to pay me back my principal? Right! I’ll use that principal repayment to reinvest in yet another one of your bonds. I’ll continue rolling my principal over and over that way, as long as you continue controlling inflation and growing your economy. In short, to paraphrase Humphrey Bogart: This is the continuation of a beautiful friendship.”
Note that the T-bond buyer does not have to be a “foreigner”; it could be anybody, of course—you, me, anyone who wants a safe place to invest some money and earn some interest. (To illustrate, go back to the previous paragraph and replace the word “foreigner” with “bond investor.” I bet you're a bond investor, via your money market fund, mutual funds, 401Ks, etc.)
So the next time you hear a politician or journalist warning us of impending doom due to foreign debt-holders, send them an email asking a few of the following questions:
You warn of impending doom due to the debt, and to the debt held by foreigners. But if we continue growing our economy enough to more than cover the interest payments, what’s the problem? That’s what’s been happening for nearly two centuries; why can’t it continue? Bond-buyers today are driving interest rates down; that’s the opposite of a “crisis.” The bond buyers apparently love to invest in our safe-haven country—so why are you implying they’re going to gang up on us and dump their bonds all at once, devaluing their own investment in the process? In short, why are you peddling fear? Just maybe, could your motivation be power politics, as opposed to objective economics? Or maybe you’re just trying to sell books?
My bet is on politics as the best explanation for the fear-mongering, with ignorance and xenophobia running a close second and third. In any case, objective economics won’t support the rhetoric.