Term Papers on Please, Lend Us Less

Term Paper Title	Please, Lend Us Less
# of Words	975
# of Pages (250 words per page double spaced)	3.9

Please, Lend Us Less

Foreigners have snapped up more than a trillion dollars’ worth of U.S. government debt, but if you ask why, you’ll discover more bad news than good

Oct. 1 —  Someone recently noticed that foreigners have invested heavily in U.S. Treasury securities—so much so that their money covers the cost of the war in Iraq and much of the exploding U.S. budget deficit. In the first half of 2003, foreign purchases of U.S. Treasury notes and bonds totaled $265 billion. The cumulative foreign holdings of federal debt amount to about $1.35 trillion, or a hefty 36 percent of the publicly held debt. It appears that Americans can have their cake (high government spending, low taxes) and eat it too. Foreigners will pick up much of the tab.

Well, no. Up to a point, this was true, but we have passed that point. The harsher truth is that foreigners’ voracious appetite for U.S. treasuries reflects deeper problems of the world economy that, in turn, harm the American economy. About 60 percent of this year’s foreign purchases of federal securities have come from private buyers (pension funds, insurance companies, corporations, wealthy individuals) and the remainder from government agencies (mainly central banks—other countries’ federal reserves). If you ask why they like U.S. treasuries, you discover more bad news than good.
        Start with private investors. One reason they invest here is that they lack good investment opportunities at home. During the 1990s they concentrated on stocks and bonds, contributing to the stock “bubble.” Now some funds have skirted into safer Treasury securities. What’s unchanged is that economies abroad, particularly in Japan and Europe, haven’t been sufficiently dynamic to justify investing those funds at home. The appeal of American investments is more an indicator of their weakness than our strength.
        The trouble is that their weakness boomerangs on us. Together, Europe and Japan represent almost a third of the global economy, reports the International Monetary Fund. If these economies are feeble, the demand for U.S. exports may be feeble. And so it’s been. From 2001 to 2003, Japan’s economy grew a pitiful 0.5 percent a year; the rate for “euroland” (the countries using the euro) was barely better at 1.1 percent. With stronger economies abroad, the American recovery would have been stronger.
        Now turn to central banks. They invest in U.S. Treasuries because they have surplus dollars. They have surplus dollars because, typically, their countries run trade surpluses. To maintain those surpluses, governments intervene in foreign exchange markets; they buy dollars with their own currencies. The purpose: keep their currencies cheap compared with the dollar—and thereby make their exports more competitive. Asian nations have been especially aggressive in pursuing trade surpluses through this strategy. Since 1996 the foreign exchange reserves (held heavily in dollars) of China, Japan, Taiwan, Hong Kong and South Korea have leaped from $500 ...

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