China and the U.S. Debt

I’m warming up for a longish Beginners-style article on government debt, which will come out next week or so. In the meantime, the New York Times has an article today about China’s diminishing demand for U.S. dollar-denominated debt. Theoretically this could make it harder for the U.S. to borrow money and thereby push up the interest rates on our debt (now at extremely low levels).

China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.

However, the article doesn’t mention one compensating factor. The fall in China’s buildup of its foreign currency reserves is linked to the rise in the U.S. savings rate, which is projected to rise to as much as 6-10% (it was over 10% in the 1980s). Some of that new savings will go to pay down debt, but a lot will go into savings accounts, CDs, money market funds, and mutual funds – which means that depresses interest rates across the board. On the back of the envelope, 6% of personal income is about $600 billion a year in new domestic savings to compensate for reduced overseas investment. Whether this will be enough to compensate entirely I don’t know. But if we were all one global economy in the boom, we’re still one global economy in the bust.

3 responses to “China and the U.S. Debt

  1. I really like your content but the lack of any margin on the left is distracting for my eye and so I tend to avoid your site, to my regret.

  2. Is it possible that China,due to its present economic circumstances and as our major creditor,may need or want to cash in some of their (lending) investments in our Treasuries.

  3. I agree we will likely see an increase in US personal savings rate … although I am not sure about it going to 10% level any time soon. This is a good news for the long term (we need to live within our means), but will suggest retrenchment in consumer spending (just what we don’t need at the moment). Does this mean we will experience a prolonged recession? Personal consumption expenditures as a percent of GDP has been rising steadily (over 71% in 2008).