Foreign Debt

The value of the dollar has declined with respect to other currencies, notably the euro. However, with our massive Federal deficits many observers are surprised that it has not fallen more and faster. An article in the Wall Street Journal yesterday pointed out that foreign countries are financing our Federal deficit by buying U. S. bonds. In Novermber, foreigners bought $83 billion of U. S. securities., of that Asian central banks boght $28 billion of U, S. bonds. The governments of China and Korea have been large buyers of debt along with Japan. Japan is the largest holder of U. S. debt.

If foreign countries started stopped buying U. S. bonds, or worse yet, sold U. S. bonds, it would drive up interest rates in the U. S. and that would hurt business. Sudden selling by one country would drive U. S. bond prices down and could trigger an avalanch of selling by other countries and institutions.

While the Wall Street Journal article discussed the economic aspects of this, I think the political aspects are more interesting. While George Bush has declared his intention to spread democracy throughout the world, his policy of deficit spending has made us economic hostages to countries like China and Saudi Arabia.

The old saying that Federal debt does not matter because we ow the money to ourselves no longer applies.