Foreign Debt and Economic Recovery

Have a look at Foreign-Owned Debt for 2008 and 2000-2007. There is too much money owed to foreign countries. Although optimists say that this money is being used to finance economic growth and it is a good thing, I think it depends on whether we can repay all that money back.

Read article (pdf) on China owned US debt. This is slightly old. China has already overtaken Japan as the largest holder of US treasuries, although the trends have not changed. There is still a minute risk that China or any foreign country can start a "run" on US treasuries causing it values to drop and interest rates to rise.

I think that is not how things will go. When we get out of this global recession, the country or institution that starts making profits again will get all the wealth diverted to it. We can only hope that it is the US so that foreign countries are assured to keep their dollars in US treasuries. If some other nation breaks out of the slowdown first, then there will be a sell-off of US treasuries and money will get diverted there. After all who would want to keep their money in US treasuries with low interest rates? If that happens, US interest rates would have to rise in spite of the fact that the US isn't out of a recession yet. This will cause bad inflation during a recession (stagflation).

The only reason why US can accumulate large debt is because it has no competition. US has done well economically all these years and foreign govt think that in the future US will continue to well. Foreign govts don't have much choice there and so US can get all these "loans" at low cost. All countries are doing badly in this global recession. If there is any competition in the future (who recovers first?), the large debt accumulated by the US govt will be a big problem.