>The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.
Not necessarily. If you have to ask yourself what the country had to do to keep those rates from changing. The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact. For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates.
Also high debt to GDP ratio makes printing money as a solution more attractive for a government. Inflation is a theft from everyone.
Foreign debtors have zero leverage over the United States. What would happen if China decided to stop buying US debt? Their currency would appreciate, their exports would collapse, and their economy would go into recession. Our currency would depreciate, our exports would increase, and our economy would get a much desired boost.
You will pay triple for your iPhone, your car, your TV, your laptop, your monitor... If you haven't checked recently anything you buy comes from China or has a significant % of it's BOM from China and is essentially financed by that debt. Your standard of living would collapse.
Obviously both China and the US would take a big hit but I'd argue the US would take a bigger hit. Right now the US benefits from the status of the US$ as the world's reserve currency. If all foreign US bond holders sell their their bonds the US$ will not simply depreciate, it will collapse. The US will be able to import nothing and it's not geared to handle that. It's very comfortable having the cheap manufacturing and the environmental implications somewhere else. Now none of the US debt holders want to see this happen but also no one will want to be the last one holding to debt in a collapsed currency - if someone sneezes.
Given that a lot of US businesses do their business worldwide and keep their money out of the US they won't necessarily be impacted as much but this "run on the bank" scenario is not going to be pretty.
The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact.
Not necessarily, because national debt (eg bonds, t-bills, etc) can be owned by anyone, not just foreigners. In the case of the US, as it happens, most national debt is overwhelmingly owned by Americans --think your IRA: whatever percentage of bonds you own is government debt to you.
The confusion arises because one particular strategy of hedge funds in the past has been to buy up huge controlling amounts of dollar-denominated bonds/debt from small export-dependent countries so that, if the country's economy slows down and they have to devaluate their currencies to boost exports (and thus growth), they end up unadvertently increasing the amount owed to the hedge funds in dollars. This can easily get way out of hand, thus causing the well-publicized financial crises of the 1990s, Argentina's, Greece[1] etc. But this scenario obviously does not apply for countries that do not issue foreign-currency bonds, like the US.
[1] The case of Greece is even worse because they cannot even devaluate "their" currency to boost exports, so all they can do is intentionally depress or deflate their economy to make everything (salaries, land, inputs) massively cheaper; or refinance their debt with EU-backed loans.
Inflation is from those with assets denominated in dollars (if they are not inflation adjusted). It is to those with liabilities denominated in dollars (if they are not inflation adjusted) and to the people introducing the new dollars into circulation. In the case of the government printing money, that's the government (obviously) and it's fairly reasonable to consider it a tax like any other. A somewhat regressive tax, since the more wealthy usually have more flexibility about how they store their wealth, but I don't know how it compares to sales taxes.
"For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates."
Our debt is not callable. China can say "we won't buy from you except at a higher interest rate" as new loans come due, but anyone else in the market could come in and undercut them (and might be likely to, if they knew China was backing off because of politics and not worry about the soundness of our debt) - heck, it could even be patriotic Americans - BUY WAR BONDS!
That doesn't really seem to follow, to me. The worst a single creditor could do is not bid, or bid for higher rates in future treasury auctions. The terms of existing debt are fixed. The impact of this wouldn't be large unless other creditors followed suit - there are many parties interested in buying up US debt.
Furthermore, if a holder of US debt declared war on the US, I wonder if that wouldn't be viewed as a credible reason to default on that outstanding debt - certainly doesn't make much sense to be sending interest coupon payments to someone invading your country.
The creditor could dump the bonds on the open market, and depending on the level of pain they were willing to feel, could crush the us bond markets. The fed can only stand in and defend for so long until we have to go inflationary to defend the dollar. Its actually a good thing that china controls a large chunk of US bonds, they can't dump without taking a huge hit themselves, MAD (for you cold war buffs). The countries you need to worry about dumping are ones with large amounts of hydrocarbons, Russia. They could theoretically dump, and then they have the hard asset to trade (oil) if they truly wanted to cause pain, however doing so to the US would send the entire world in to a free fall and they would probably end up worse than before, however everyone would be worse than before. It would be a large global reset.
Exactly. If China dumps their bonds rates are going to go to the sky and the US currency will depreciate. No one wants to do this but no one will want to sit on the sidelines holding billions of US bonds if this starts happening. It's not that different than a run on a bank that does not have enough reserves. (well, it's a little bit different, a bank can't print money)
What everyone is trying to do is figure out a way to unwind this slowly and/or grow out of it. I think a lot of past growth was fuelled by population growth and "free" resources (oil, coal, etc.). Population isn't growing as fast and resources aren't as free any more.
Not necessarily. If you have to ask yourself what the country had to do to keep those rates from changing. The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact. For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates.
Also high debt to GDP ratio makes printing money as a solution more attractive for a government. Inflation is a theft from everyone.