What happens when foreign countries get tired of giving America loans and decide they want their money back?

Answer 1

This is actually an open debate in international political economy, because there are forces pushing in different directions. Right now nobody knows for sure how or when other countries would react to growing US debt. This is my own brief take on the question:

The national debt reached nearly 65% of GDP last year (see graph below for a nice summary). This is a large amount, though many countries work fine with even higher debt loads. It is possible, though, that foreign purchasers of US Treasury bonds would decide some day that the US government is an unacceptable credit risk, and consequently they would sell their bonds on the open market, essentially making it more expensive for the gov't to issue more bonds. Hypothetically, if foreign countries decided they wanted "their money back", then interest rates in America would rise steeply, probably triggering a major recession. Common sense says that the country has been living beyond its means for decades now, and some kind of adjustment is in order. The adjustment envisioned here is sometimes called the 'hard landing' scenario.

However, there are complicating facts about the world economy that throw doubt on the simple case above. First, US gov't debt (Treasury bonds) is almost universally considered the safest, most convenient investment instrument in the entire world, especially for foreign gov'ts, who often need to keep massive sums in reliable and easily accessible places. In other words, the US dollar is the world's reserve currency, and the best way to hold it (as a foreign country) is to buy US bonds, which are sold and resold on open markets to whomever is willing to buy them. The perceived political stability of the US is the fundamental reason for the status of the dollar--that is, our institutions and basic economic policies are considered to be among the most stable in the world, and, unlike other highly stable countries, (e.g. Norway), we float enough bonds on the global markets that any borrower can easily buy or sell large quantities as needed, anytime. Some have argued that the euro could take over this reserve function from the US dollar if the US gov't borrowed too much; so far, however, the murky status of the EU and the different economic policies of member countries have hampered the currency. Currently, then, there is no ready alternative to the US dollar as a reserve currency, and therefore, the desirability of US treasury bonds should hold up for the foreseeable future.

In addition, should those 'foreign countries' decide to dump their US debt on the markets and trigger the 'hard landing' scenario, they too would end up in major economic distress. Take China, for instance. If they dumped their several hundred billion worth of US bonds tomorrow, then when the US economy went into recession, they would see a similar crash in their export proceeds from US markets. Arguably, a prolonged recession at this point is much more dangerous for the Chinese Communist Party than for the US as a whole. So, it is in China's interest to hold on to its US bonds.

Overall, I think the threat of foreign creditors 'calling in' is overblown for now, but the growing US national debt is still a cause for worry as a long-term trend. Certainly there are some limits to the government's easy borrowing, even if those limits are higher than what we'd expect at first.

Answer 2

What foreign countries are you speaking of that have provided the US loans do you think would initiate this action? I know of multiple countries that purchase our government bonds and securities but these are not loans.

If you are speaking of the IMF then these involve primarily currency credits, transfers and deficit balance assistance that are not considered loans in the true sense.

The US does make billions of dollars in loans every year and perhaps we should just call all those loan immediately due and payable if indeed the US has their loans recalled.

What would happen to all the countries if the US got tired of giving them loans?

Besides, these countries have made the loans to make money; not just get their principle back. What would be their incentive?

Answer 3

Well, the United States has the large debt (about a bit less than $10 trillion). And yes, it is the world's largest debtor. As another country, I wouldn't try to get my money back. I'd rather loan out to someone else who could pay. China perhaps?

Answer 4

Um actually if you ever been in a history/government class or anything of the sort you would have learned that america is the one always loaning out money and supplies. We never get paid back so it effects our national debt and has been for centurys