3 March 2007
Dear Sen. Clinton,
As my colleague Russ Roberts noted, a good economist could teach a semester-long seminar on the avalanche of errors,
half-truths, confusions, and question-begging assumptions roaring
through your recent letter to Treasury Sec. Paulson and Fed Chairman
Bernanke. My letter to you, alas, must be brief.
First a question. You note that $2.2 trillion worth of U.S. treasuries are
owned by "foreign nations." By "foreign nations" do you mean "foreign
governments"? Or does your figure include also treasuries held by
private foreign citizens? I suspect the former — although, for reasons given below, it doesn’t matter very much.
A more fundamental point is that you are
comically simplistic to assert that these foreign holdings of U.S.
treasuries mean that Americans "can too easily be held hostage to the
economic decisions being made in Beijing, Shanghai and Tokyo." The
worst thing these governments can do to the U.S. with their treasuries
holdings is to dump them, driving their price down. But precisely
because these holdings are large, these governments themselves would
suffer huge losses if, in an attempt to influence U.S. government
policy, they dumped their holdings. (If, on the other hand, foreign holders of U.S. government debt dumped these holdings for economic reasons — worried that the value of this debt will soon fall — then there’s every reason to suppose that the very same dumping of this debt would occur if every cent of the debt were held by Americans.)
In fact, foreign-government
holdings of U.S. debt arguably make these governments "hostage to the
economic decisions being made in Washington." The Fed, after all,
could monetize this debt, inflating away its value. Or Uncle Sam could
repudiate this debt, or unilaterally change its terms in ways unfavorable to holders. Or you and your colleagues could implement
economically disastrous policies that drive up long-term interest rates
and, hence, drive down the value of outstanding treasuries.
For you to ignore these reciprocities and realities is inexcusable.
Donald J. Boudreaux