Very Basic economics question.

Discussion in 'Economics' started by tj07, Jun 7, 2007.

  1. tj07


    How is China funding US debt by accumulating dollars from a trade surplus, and why is this bad for the US?

  2. Think of it like having low blood pressure...not enough blood to get to all the parts of your body...same with the economy, money is harder to get (loans?) when others are hogging it all. :p ....i hope this is a right/good example.

  3. toc


    who says it is bad for US?it is getting goods in return of paper bonds...........wait until US$ devalues.....:D :D :D :D :D :D :D
  4. swilner


    much of the fear is that China will dump the Treasurys--or at least be a partial seller. This would put upward pressure on our interest rates.
  5. agree with swilner
  6. would you mind explaining why selling of the dollar puts upward pressure on our rates?
  7. Selling USD -> USD depreciates

    To prevent USD from depreciating, you could raise interest rates - thus giving people an incentive to buy up USD (causing appreciation of USD) and invest it to earn the higher interest rate
  8. "Treasury dumping" would lead to a lower Dollar causing the fed to defend with higher rates. At least that's my understanding. Controlled devaluation can be a good thing. Uncontrolled devaluation is not and that's what the Fed would want to prevent.
  9. Daal


    no. the fed doesnt need to be involved. people sell bonds the prices of bonds go down yields need to go up
  10. timcar


    To answer OP question: China sends more goods to US while US sends $ over to China. Since China has money piling up they then looks for highest yielding or safest place to invest all their excess dollars.

    Since US govt needs to borrow money US issues bonds to whomever has excess dollars.

    Its bad when one country (China) holds a large % of US govt bonds. Borrower is slave to lender. At some point in future US must pay back.
    #10     Jun 7, 2007