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I Do Not Endorse The Policy Described Here (But Sen. Clinton Should)

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Unlike Sen. Hillary Clinton, I do not believe [2] that large holdings by foreign governments of debt issued by Uncle Sam is a cause for great concern.

But let me grant, for sake of argument, that Sen. Clinton’s concerns about the amount of U.S.-government debt held by foreign governments are both real and justified.  Does it follow that the best remedy for this problem is trade restrictions?  I think not.

Remember, Uncle Sam is the one who spends much more than he reaps in taxes — and this fact is not due to a decline in tax revenues [3].  If Sen. Clinton and her comrades in Washington did not spend so much, there would be less government debt for Tokyo, Beijing, London, and governments in other foreign capitals to buy.

In short, ultimate blame for the problem rests with Congress acting in cahoots with the President to spend beyond Uncle Sam’s gargantuan tax-take.

So, if we take also as a given that Uncle Sam will continue to spend irresponsibly, why not attack the problem of foreign ownership of U.S. debt directly: why doesn’t Uncle Sam announce that he will not pay debt held by foreign governments?  Sen. Clinton can make the announcement herself, something like "My colleagues and I, with the approval of the President, have decided that all debt that our government issues from this day forward will be paid on schedule only if it is held by non-foreign governments.  We will honor no debt obligations, issued from today forward, held by foreign governments."

I’m no financial wizard.  Perhaps there are ways that foreign governments can circumvent this restriction and still manage to hold in their portfolios lots of U.S treasuries.  But to the extent that Uncle Sam’s refusal to pay debt obligations held by foreign governments would indeed reduce the amount of U.S.-government debt held by those governments, this policy would be a more direct means of addressing the concerns that motivated Sen. Clinton’s letter to Treasury Secretary Paulson and Fed Chairman Bernanke [4].

Of course, such a policy would also reduce the attractiveness of U.S. treasuries, increasing Uncle Sam’s cost of borrowing.  But so what?  If Sen. Clinton’s concerns are valid, why not attack the problem directly — by refusing to pay debt held by foreign governments — rather than indirectly by imposing trade restrictions on American consumers?

Let me be clear: I do NOT favor such a policy of Uncle Sam refusing to pay off any of its debts that are held by foreign governments.  Nor do I favor trade restrictions as a means of dealing with this alleged problem.

But I do wonder why Sen. Clinton doesn’t propose and support a policy of Uncle Sam refusing to pay any of its debts held by foreign governments.  The fact that she does not suggest and support such a policy — the fact that, among the remedies she praises for this "problem," are protectionist legislative proposals offered by her Senate colleagues Byron Dorgan and Art Carden — tells me that Sen. Clinton’s motives are really protectionism in ugly disguise.

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