An e-mail correspondent (on this post ) wonders at my hostility to Sen. Hillary Clinton’s recent letter to Treasury Secretary Paulson and Fed Chairman Bernanke. This correspondent’s argument, if I understand it, can be summarized thusly: I (Boudreaux) am forever critical of government, so I am inconsistent in arguing that, because massively selling off their U.S. government debt holdings will hurt them economically, foreign governments are unlikely to dump huge quantities of this debt on the market.
Because governments are driven largely by political and non-economic motives, the risk of such sell-offs by foreign governments of their holdings of Uncle Sam’s debt is real. Therefore, I am inconsistent (the argument goes) to criticize Sen. Clinton for worrying about the fact that a large percentage of U.S. debt is owned by foreign governments.
This criticism of my position has some merit. Foreign governments might find some benefit in accumulating goo-gobs of U.S. treasuries and then dumping them suddenly on the market, causing interest rates in the U.S. to spike — all the while not caring much that they (the foreign governments) will lose lots of money by their dumping of U.S. treasuries.
Imagining just how a foreign government would practically benefit from such dumping isn’t easy for me. I suppose that a hypothetical example of what some people have in mind might be Beijing threatening to dump its holdings of U.S. treasuries if the U.S. government intervenes militarily to help protect Taiwan.
(Another criticism, related to the one of my e-mail correspondent, comes
in the comments to my letter to Sen. Clinton. GeorgeNYC argues that
foreign governments don’t have to do anything drastic with their
massive holdings of Uncle Sam’s debt; they can act at the margin —
threatening small harm, but harm enough to influence U.S. policy. Because government holdings of U.S government debt aren’t truly free-market phenomena then – then – then what? Should we make the market even less free by further restricting trade?)
I’m no historian. I cannot say how frequently such financial threats, big or small, have been used by government A to bribe government B into a course of action that government B would have otherwise avoided. But even if we assume that the potential for such threats is real, linking the issue to foreign trade is disingenuous and hypocritical in the extreme. The problem, to the extent that one exists, has almost nothing to do with trade and almost everything to do with Uncle Sam’s own profligacy.
Clinton and other Washington politicians who shriek in horror about how much U.S.-government debt is owned by foreigners are beyond hypocritical. Here’s how I summarized the matter last April in a letter to the New York Post:
20 April 2006
To the Editor, The New York Post:
Let me get this straight. Uncle Sam annually spends hundreds of
billions of dollars more than he reaps in taxes. To finance his
reckless deficit spending, he must borrow dollars. The Chinese oblige
by lending him dollars. Congress and the administration then
self-righteously accuse China of financial misconduct ("Bush, Hu Make
Little Progress on Trade," April 20). Hmmm….
Uncle Sam is behaving like a drunkard who blames his alcoholism on Jack Daniels.
If there is a real problem with foreign governments holding large amounts of U.S.-government debt — if Uncle Sam’s independence and integrity are compromised by his being in debt to so many foreigners — the solution is for Congress to stop spending more than it reaps in taxes.
But rather than point the accusing finger where it should be pointed — at Washington’s big-spenders — Clinton and more-seasoned protectionists insist that open trade is somehow to blame for Uncle Sam borrowing like mad and foreign governments being among his creditors.
And worse, their proposed solutions all involve restricting American consumers’ freedom to buy foreign-made goods and services.
Uncle Sam behaves irresponsibly, begins to worry about some of the consequences of this irresponsibility, and then insists that these ill-consequences are best avoided by making it harder for American consumers to seek out and take advantage of good deals offered by foreign sellers.