Can someone help me understand US debt?

[AFCM]

This is what I sort of understand about US debt: When we trade across international borders, if we fall short of even in the trade we must pay the difference. The US then pays more money or another country, such as Japan or China, pays the difference. The US can print more money to pay but that only leads to hyperinflation.

...and that's about where I lost it. Can someone please explain the US debt in 'dummy' terms? Also, should we be seriously worried that China, a communist nation, owns so much US debt?

[windowphobe]

The trade deficit isn't really connected to the national debt; we may import more than we export, but we don't obligate the Treasury in so doing. The Chinese own so much of our debt because of the way they handle import receipts.

Like most debt, the national debt is the result of borrowing: the Bureau of the Public Debt, a Treasury sub-office, is constantly offering securities for sale, and anyone can buy them.

How the Chinese get them is slightly weird. If a Chinese factory earns dollars, it must by law surrender them to a bank operated by the Beijing government, which then issues yuan (RMBs) to the factory. Beijing then buys Treasury securities with the dollars. Depending on whose numbers you believe, somewhere around 70 percent of China's foreign holdings are denominated in dollars, though they handle their exports to Europe and Japan pretty much the same way.

James Fallows has a really excellent piece on how this process works in the January/February Atlantic.

[dismayed]

Here's the ten second solution.

The government buys things. It collects taxes to buy those things. Our government buys more than it collects in tax dollars, and so it buys lots of stuff on credit. This is our national debt.

Where does the US Government go for credit? It asks people and corporations to give the government a loan that it uses to buy the things that it doesn't have money on hand for. This loan is eventually repaid to the people along with some interest. This loan is what we call US Savings Bonds.

US Savings bonds are owned by you and me and foreign governments, so the government owes us money. If the government ever decides to go bankrupt, the government will be fine but everyone who has a US Savings Bond will basically be screwed. But they would never do that because in turn they would be screwed... no one would buy one of their bonds again, at least not unless the government made it worth their while.

[AFCM]

Thanks. So, basically China just owns a bunch of bonds. I get it. So, they wouldn't likely have a reason to disrupt our economic system, not only because we import so much from them, but because they'd lose so much money from the bonds? Right?

[windowphobe]

Pretty much. If they cashed in a bunch of them at one time, the yields on subsequent buys would be less favorable. Of course, they could stop buying them altogether, but they've given no indication that they'd consider that: they see that their ownership of this debt gives them leverage. (Old saying: You owe the bank ten grand, the bank owns you. You owe the bank ten billion, basically you own the bank.)