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June 06, 2006

Impacts of cashing out

What would if foreigners cash out the billions of dollars of U.S. government bonds they own? That's the question N.C. State University's Mike Walden explores in today's Economic Perspective.

"Well, first of all, I think it is unlikely to happen," says Dr. Walden, an economist with the College of Agriculture and Life Sciences.

"I mean, take a country like China: They clearly are buying a lot of U.S. bonds, as people know. But they are buying them out of their own self-interest. They are not just doing it to help out the U.S., because China wants to keep U.S. interest rates low so they can sell more of their products here in our country. And one of the ways to do that is to try to help out the U.S. in terms of our debt.

"So it would be unlikely, I think, that we would see China one day say, 'You know what? We don’t want to own this debt, and we’re just going to sell it.'

"So I don’t think we are going to see any big sudden move. And I think any movement away from U.S. investments would likely be gradual.

"That said, though, what would be the impact of any major dumping, if you will, by foreign countries of U.S. bonds?

"Well, the Federal Reserve actually estimated that, and they say the major impact would be on U.S. interest rates. If the foreigners who now own U.S. bonds had not bought them, U.S. interests rates would likely be higher -- maybe by as much as one and a half percentage points."

Posted by deeshore at June 6, 2006 08:00 AM