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December 11, 2007

Will overseas investors cash in?

Some people worry foreign owners of United States government securities could use their stockpiles of U.S. bonds in a form of financial blackmail where they threaten to dump those bonds if U.S. policy isn't positioned in a certain way. What's the likelihood of this happening? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, that would make a great backdrop for a novel. In fact, maybe there is an idea for us to write a novel about this, a suspense thriller. But in reality it's likely not going to happen.

"Now, a little background here. Of course, the reason foreigners have bought so many bonds is that we sell bonds; the U.S. government sells bonds when we run a budget deficit. And foreign countries, particularly China as a good example, have been, as many people know, industrialized, and their economy has been growing, so their government has amassed money, funds, and they are looking for investments. U.S. government bonds are very good, very sound investments. So the Chinese have been accumulating a lot of our U.S. government bonds.

"Now, if the Chinese were, for example, to say, we're going to dump all these bonds (which is another way of saying they're going to sell them) if you, the U.S. government, doesn't do something we want you to do, people think, yeah that's going to hurt the U.S. But it would also hurt the Chinese because if they were to sell their bonds, the value of the bonds would go down, and they would actually get less money for them. So levelheaded economists don't see this as a big issue. Of course, there is the wider issue of our U.S. debt and our borrowing. But we really don't see foreigners owning U.S. bonds using them as a form of financial blackmail. That just is not going to happen."

Posted by Dave at December 11, 2007 08:00 AM