How does China come into the equation when the US has a huge deficit?

Question

I keep hearing that China controls much of the US debt and could easily destroy the economy. How so?
I don't understand how this works.

I am a novelist who writes about speculative futures.

Answer 1

China has about $800 billion in US-dollar-denominated bonds, in the vault of their central bank. Only the Japanese hold more bonds than the Chinese do. If China or Japan, or any country with a large cache of US bonds were to sell those bonds, then the prices for those bonds would plummet. (When the supply of something goes up, the price goes down.) When the prices of bonds goes down, it means that interest rates go up.

Since the US has such a huge budget deficit (we borrowed $620 billion in fiscal year 2005, alone), it means that the US has to borrow more and more money, every year. The US has to pay interest on the money that we borrow. If interest rates were to increase, it would mean that the US would have to pay more and more money, just in interest, in order to attract those new loans.

Private businesses in the US (not to mention anyone who buys a house or anyone who uses a credit card) also rely on credit. It means that they have to borrow money. If the interest rate that the US Government has to pay for ITS loans goes up, then it means that the interest rate that businesses and home-buyers must pay will also go up. This would happen because loans to businesses and home-buyers are riskier than loans to the US Government, so these people would have to pay interest rates that are higher than the rate paid by the US Government. Holders of credit cards would have to pay even higher rates, because revolving credit (credit cards) are even riskier loans.

When interest rates go up, it means that the monthly payments on every kind of loan goes up. If the interest rate goes up far enough, those monthly payments can get so large that the people taking out the loans cannot make their minimum monthly payments. When that happens, economic activity grinds to a halt, because there is no money left over, after paying the bills. People can't buy anything, so businesses can't sell anything. The economy stops.

The value of the dollar is based on the strength of the US economy. When the economy stops, or even slows down, the value of the dollar falls. When the value of the dollar falls, it means that the prices paid for goods and services must increase. When prices increase beyond the ability of people and businesses to pay for goods and services, the economy slows even further.

This train of thought is intended to explain the fact that China, all by itself, could easily take actions that would be perfectly legal, but which would destroy the US economy.

To show you how precarious the situation is, there was a news article, back in the early spring of 2005. An official from the central bank of South Korea HINTED that South Korea would begin to look at the idea of slowing down its purchases of US-dollar-denominated bonds. This official didn't say that South Korea would sell its existing bond holdings (at the time, around $65 billion). All he said was that South Korea might slow the rate at which it buys new US-dollar-denominated bonds. Immediately, the value of the dollar plummeted. It wasn't until a more-highly-placed official at the central bank declared that South Korea had no intention of slowing down its buying, did the value of the dollar stabilize.

When South Korea, which owns $65 billion in US-dollar-denominated bonds can have such an immediate and drastic impact on the value of the dollar (and, thus, on the US economy, itself), just imagine the power that China wields. And not only China, but Japan. The US is now in the situation where our Government is in a vulnerable position. It can be blackmailed by any of a number of countries which hold large amounts of US-dollar-denominated bonds. All they have to do is to threaten to stop buying those bonds, or to sell the bonds that they already own. We are at their mercy.

Answer 2

China sells a lot of products to the United States and at the same time purchases a lot of the U.S. bonds.

Many ignorant alarmist have called for the United States to somehow force China to do something different. The problem doesn't lie with China. China is a poor country that's willing to work for less. There are many, many countries who are poor and are willing to work for less. Ethiopia, Congo, Panama, and many other poor countries who will certainly come in and fill China's shoes. We shouldn't be unhappy that another country is poor. In fact, we should be happy, because it means that the U.S. is rich!! Anyway, there's no way to stop the poor from working for less.

So, what is the solution to the problem? The problem is the Giant Deficit. It means that we are spending money we don't have and keep borrowing money. The U.S. have cut taxes, but kept spending more money. The problem doesn't have anything to do with China. It has to do with our spending habbits.

There is an advantage to China selling things cheaply to the United States and other countries as well. Because we are buying goods and service for less money, as a country, we have less expenses, which means we will have larger profits as a country. This is why no country that understand economics try to stop China from selling things cheap. Let's take an example to illustrate. Let's pretend that Canada and United States made the same amount of money as a country last year. However, this year, United States decided to tax China's products making them more expensive. Canada keeps buying cheap Chinese products. Because Canada will have less expenses, it will grow larger than the United States, because it had larger profits.

Don't worry. China selling cheaply won't last. Just like any country the lifestyles and salaries of the country will slowly improve, making it impossible for them to make things cheaply anymore. It will happen slowly. However, once China's wage become too high to produce good cheaply another country, such as Ethiopia, will takeover the job.

Answer 3

Break: United Startes has been fighting under and upper surface and undersea war with just about everybody on the planet. ... RThat's a costly thing a to an economical view, that everything has a price, and success lures for those willing to trrample everybody else into the grave..... Instead America is bankrupt...... militia's are on the loose in the country, and to top it al the columbines rule the show........ Madness America brought us disrespect and cheap lies....... I love America for it's opportunity's to dictate..... And love China to buy up the markers just for a good old fashioned laugh

Answer 4

If China decides to call loans to term, our economy would come to a standstill. It would be like every bank and lending house calling you up and asking the balance you owed them plus inevitable interest to be paid immiadiately.
This is why we run a trade deficit with China, we allow them to make easy money off us, while the domestic financial markets focus on creating wealth and moving jobs overseas to increase profit and lower expenses.

Answer 5

The US economy gets a cold, the Chinese economy sneezes...
China does not want to hurt the US economy...
China does control much of the US debt but most of China's money
comes from the USA...

Answer 6

easy,, china buys millions of scrap from the us ,, including plastics, metals and other comodities,, they then find ways of reusing those materials and making products from them at a profit ,, over what it cost to buy the materials from the us ,, then they resell them back to us companies at a profit, plus any export cost,,, 2 we are paying double for the same thing , because we pay overseas compaines small wages for mass production,, but in turn they are taking our imports of good and making other things as well which is boosting their economy and building capital there not here,,, then on top of that they are purchasing companies in this country and selling their products here and sending all profits back to china, not paying into this country,, which builds no source of financial structure here,,,,,,sound pretty easy to fix ehh ???!!!,, but obviously our greedy buerocrats dont care ,, except how much they pocket in the long run,,,,

Answer 7

most of our items are made in china...we need them, we send a lot of money overseas to china for these products. in turn, china does not need many items made in the US, therefore we have a huge trade deficit with china. yes, it might seem like they have control...but without us and without our business, their economy would suffer greatly as well. do you know how many people would be out of jobs if we stopped buying from them? if they wanted to hurt us, they would in turn hurt themselves pretty badly.

Answer 8

i think of u . s . a . of america, and nato is going to tug China into ww3. already nato is on a rampage, attacking a gaggle of international locations. u . s . a . of america became desprate sufficient to degree the bin encumbered execution so as to tug pakistan into the conflict. an attack on Pakistan is an attack on China. nato is in the back of many of the clashes in viet nam, philipines, korea, etc. nato is likewise in the back of approximately 80% of the clashes worldwide. that's how they maintain superiority, by ability of inflicting chaos in different international locations. of direction, nato international locations additionally earnings from ww3 as they're in the back of the worldwide financial company, the un, and imf who're conflict profiteers

Answer 9

China doesn't necessarily control the US debt, but they certainly contribute to it. They ship five times as much to the US as the US ships to it.

Answer 10

Well, its kind of like the bank that holds your house mortgage, what would you do if they called it in right now? Our economy is dependant on their supporting it, with no new investment money from them, we wouldnt be able to function.