RE: RE: RE: RE: These two numbers have increased !Thanks Curvature, that helped!
I profess to be a complete novice at understanding the implications of international trade balances, so bear with me ...
First of all, the fact that the Chinese holdings are about 9% of total US National Debt puts its in perspective. They are large, but China's not the only major holder. Good point! OK, got that!
But reading up on it (quickly!), I gather the issue is more one of assessing what power China holds in its hands to affect the US economy. I came up with the following, extracted from the following article, which I submit for your consideration.
Comparing it to an individual's personal finances, it seems to be akin to worrying what your largest creditor could or might do to you, having the right to sell off your note to a third party, knowing that you are in no position to repay his debt on demand. And when that "largest creditor's" actions are visible to all other credit agencies, how that might affect your position with them. It's something of "the elephant in the room" situation. If the elephant moves, it probably won't be to your advantage.
Anyway, first the article quoted: https://www.fas.org/sgp/crs/row/RL34314.pdf
"Since China held $1.2 trillion of U.S. government assets as of June 2008 (and possibly $1.5
trillion as of June 2009), any reduction in its U.S. holdings could potentially be large. If there
were a large reduction in its holdings, the effect on the U.S. economy would still depend on
whether the reduction were gradual or sudden. It should be emphasized that economic theory
suggests that a slow decline in the trade deficit and dollar would not be troublesome for the
overall economy. In fact, a slow decline could even have an expansionary effect on the economy,
if the decrease in the trade deficit had a more stimulative effect on aggregate demand in the short
run than the decrease in investment and other interest-sensitive spending resulting from higher
interest rates. Historical experience seems to bear this out—the dollar declined by about 40% in
real terms and the trade deficit declined continually in the late 1980s, from 2.8% of GDP in 1986
to nearly zero during the early 1990s. Yet economic growth was strong throughout the late 1980s.
A potentially serious short-term problem would emerge if China decided to suddenly reduce their
liquid U.S. financial assets significantly. The effect could be compounded if this action triggered
a more general financial reaction (or panic), in which all foreigners responded by reducing their
holdings of U.S. assets. The initial effect could be a sudden and large depreciation in the value of
the dollar, as the supply of dollars on the foreign exchange market increased, and a sudden and
large increase in U.S. interest rates, as an important funding source for investment and the budget
deficit was withdrawn from the financial markets. The dollar depreciation by itself would not
cause a recession since it would ultimately lead to a trade surplus (or smaller deficit), which
expands aggregate demand.28 (Empirical evidence suggests that the full effects of a change in the
exchange rate on traded goods takes time, so the dollar may have to “overshoot” its eventual
depreciation level in order to achieve a significant adjustment in trade flows in the short run.)29
However, a sudden increase in interest rates could swamp the trade effects and cause (or worsen)
a recession. Large increases in interest rates could cause problems for the U.S. economy, as these
increases reduce the market value of debt securities, cause prices on the stock market to fall,
undermine efficient financial intermediation, and jeopardize the solvency of various debtors and
creditors."