Originally Posted by
Adam Strange
What it means when foreigners own US debt.
In a trade of goods and services between countries, one country sends actual goods (stuff, cameras, snow shovels) to another country in exchange for signed contract notes (currency) which promises to the holder of the paper that the holder is entitled to get something from the currency issuer in the future. They send us real stuff, we send them crates of banknotes.
Normally, the foreign nation could come back to us and say, " Remember all those snow shovels and cameras I sent to you? I now have all these promises from you that you will give me something of value in return. I want the Washington Monument. Crate it up. I'll return your notes when it's on the dock."
To prevent foreigners from buying something that we like, like the Washington Monument or GM, Congress has imposed restrictions on what foreigners can buy from us. Most military hardware is OK, but businesses and a lot of property is off-limits. So what is a foreign country going to buy, when they aren't allowed to buy most things?
They buy government bonds. Bonds are US debt, which again, are promises to give them more dollars in the future in exchange for some dollars today. This is easy to promise, because we print dollars.
So it would seem that they send us real stuff, and the only thing they can get back from us is crates of paper. Why would they do this?
Because by having a foreign buyer create demand for their goods and services, they can stimulate their economies. They can find work for all of those people who want jobs but can't otherwise find work. It is a huge make-work project. In addition, they actually can spend some of those dollars in third-party countries (like Germany) to get access to the latest and greatest machine tool technology which they can reverse-engineer to modernize their country, but mostly, it is a way to keep their people busy and content. The ancient Egyptians did the same thing when they employed the idle farmers to build pyramids. Those pyramids were not productive in the sense that they produced anything, they just kept the people busy.
Does having foreigners hold a lot of bonds hurt the US at all? If they call the bonds in, we can just print more money and send that to them. They don't actually get stuff for those bonds. So the only way that getting stuff from other countries in exchange for "debt - a promise to give them more green paper" is that they are working at jobs and we are not.
Of course, those jobs mainly consist of hordes of people assembling iPhones for 14 hours a day in exchange for a cup of tea and a place to sleep, and I'm not sure that many people in the US would do that kind of work, but there is a loss to the US of certain jobs.