[westicle]

>> Since it's not an investment, it's not an investment the Chinese can lose faith in. And it's certainly not a favor to the United States of America.

I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context.

I would have thought as a general rule: a debtor at risk (even theoretical risk) of default constitutes a concern to its creditor.

I also don't see what giving favours has to do with buying and selling bonds.

[bradleyjg]

The most important metric is excessive inflation, and the secondary one is exchange rates (though changes in that have mixed effects). These are empirical facts of the matter.

There's lots of theories about how this or that or the other thing might cause high inflation and/or devaluation. But when you look at the track record of these theories they are pretty horrible. QE1 and QE2 was supposed to lead to imminent hyperinflation. It didn't happen. The S&P downgrade was supposed to lead to yield spikes in treasuries (which in turn was supposed to lead to heavy inflation). It didn't happen. Deficit spending was supposed to lead to bond vigilantes coming out of the woodwork and cause catastrophic inflation. It didn't happen.

As a formal matter the government doesn't even need to issue bonds. Under this view (which broadly speaking goes by the name MMT) the government doesn't have a budget per se at all. When a bill comes due they can just create dollars out of thin air to pay it. When taxes or other fees are paid to the government they don't get stored anywhere to be used to pay bills, but instead cease to exist. Advocates of MMT suggest that the government tweak outflows and inflows not with the aim of balancing a non-existing budget but rather based on managing observed metrics (mainly inflation).

Critics claim that a move to such a system would cause hyperinflation. Who knows, they might even be right for once. The important take away is that the US government is not just a really big household, and US treasury bonds are not just like a credit card.

[aliston]

The reason we haven't seen inflation is that, despite all the printing, the money supply has not increased since 2008. This is because the velocity of money and the money multiplier have both decreased significantly since the financial crisis -- in essence, people are not borrowing or spending the way that they were in 2008. If people aren't spending, you aren't going to get inflation... until you do.

[bradleyjg]

Post hoc rationalizations are inherently non-falsifiable.

[RyanZAG]

Some people believe that China buying US government bonds is a favour to USA as it allows the US government to spend all of this money coming in on various government projects, such as military spending and social security. If China stopped supplying that money, the US government would have to print it themselves (for free), which would lower the value of US currency. Some people believe this is a good thing, and others believe it's a bad thing. There are so many complex and mostly untested effects at play that I'd be a bit worried if anyone claims to have the one true answer here.

  Pro for China buying bonds
  - US government has more money to stimulate economy
  - US dollar remains strong, so buying from offshore is cheap
  - Higher quality of living in USA means more people can
    spend time inventing new industries

  Con for China buying bonds
  - US dollar weaker, US firms are under-priced when exporting
  - When China stops buying bonds it will cause a shock effect
    on US economy
  - Higher quality of living in USA means less people are forced
    to invent new industries or starve
  - US government is wasting the money on stuff like TSA instead
    of using it to grow the economy

These are just off the top of my head. There are far more effects and knock-on effects. Anybody trying to tell you this stuff is simple just doesn't understand it themselves.

[jbooth]

A favor? There's no such thing as a favor.

The US offers bonds in $ at a certain very low interest rate and China buys them in order to maintain their low yuan valuation. As stated in the article, this is to manipulate currency prices for domestic reasons to keep their exported goods "cheap" in terms of the global reserve currency, dollars.

Your cons are all messed up. They're making the dollar stronger and the yuan weaker, deliberately, and that makes our firms over-priced when exporting. We've had 1% inflation for like 5 years now.

If they didn't have that industrial policy, we'd probably have to be selling our 30-year tbonds at 3-4% instead of sub-1% as they are now. They do have the policy, so we should frankly be selling more bonds and spending the money on infrastructure, but hey, that's a hard story to sell for some reason.

[mseebach]

It's not a favour, but then again, most favours aren't. "I owe you one" implies an expected mutually beneficial exchange.

It's a reliance on a (single) counter-party continuing to find the deal attractive. If, for whatever reason, they stop, the cost of debt will explode and bad things will happen. As you mention, it's a policy. Policies are subject to change. The Chinese economy is maturing into consuming more of its own output, and Chinese people are growing wealthier and more interested in buying foreign goods - both are long term trends that makes that policy less attractive.

The reason it's hard to sell that the existence of cheap debt as a signal to borrow and spend, is that the US isn't paying down its loans, it's rolling them over into new debt and assuming that the new debt is not significantly more expensive than the current.

That assumption need to hold several decades in the future. If it fails, things get real ugly.

EDIT: By "bad things" and "real ugly" I mean significant, sudden inflation which voters are unlikely to reward.

[jbooth]

That's fair, and the commenters below pointed out that I was sort of conflating the short and long term yields on bonds, which dampens the enthusiasm for borrowing.

The thing is, right now, all of our borrowing is for things that don't pay much of an economic dividend, and meanwhile our infrastructure is going to absolute hell. If there was ever a time to borrow and spend some money on infrastructure, this is it. We can believe that while also believing the systemic budget problems need to be fixed.

[joshuahedlund]

> They do have the policy, so we should frankly be selling more bonds and spending the money on infrastructure, but hey, that's a hard story to sell for some reason.

Doesn't that put us at increased risk of the policy changing and then having that much more in bonds to roll over when the rates go back up? (Or are we are highly confident that the investment will pay off before the policy changes?)

[mkr-hn]

I might be misunderstanding the nature of the bond market, but the treasury's website says 30 years are at > 3%.

http://www.treasury.gov/resource-center/data-chart-center/in...

[thejteam]

That chart is for yields, which is distinct from rates. Although the rates for 30 year bonds are also greater than 3 percent (3.625 in the latest auction). However, if you are looking at inflation protected securities (TIPS) a 30 year TIPS bond has an interest rate of 0.625.

http://www.treasurydirect.gov/RI/OFNtebnd

[bkmartin]

Please do not lump Social Security as part of the problem. That program is solvent. Your main point is correct, but maybe medicare is a better example since it is not a self sustaining program.

[jes]

This article[1] comes to a different conclusion:

“Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.”

Is the article in error?

[1] http://www.forbes.com/sites/mikepatton/2013/06/12/is-the-soc...

[Thrymr]

That's because Social Security has been running a surplus for many years (until 2010). The question is whether the US government, which already spent that surplus, but gave a bunch of bonds as promissory notes to repay, will actually do so. Payroll taxes were meant to prepare for the baby boom retirement, and were enough to do so, but that money is gone, not in a "lock box".

[_delirium]

It's also been completely expected since the 1980s, so it's weird that this is now being portrayed as some kind of a problem. Reagan proposed an increase in payroll taxes, so that Social Security would run a large surplus for ~25 years, which would then fund the baby-boomer retirement. As far as cash-flow goes, that surplus went into the general treasury during the surplus years, and now it is the general treasury's obligation to repay it to Social Security out of general revenues for the next ~30-40 years.

It's possible people will choose not to do so, but that's not a matter of Social Security being insolvent. That's a matter of people simply not wanting to keep the promises, because they want lower taxes or something. If Social Security is not repaid, then payroll taxes will be retroactively converted to a regressive general income tax, where only income under $114k is taxed, which would be rather bad.

[pessimizer]

>Is the article in error?

No, just euphemistic propaganda. The "disruptive consequences" are that within 20-30 years Social Security may have to be cut to what will be a higher benefit (if productivity gains are considered) than people are currently receiving now. The "legislative changes" are to cut benefits now.

Lumping Medicare in, which has a serious problem because of the horrible US healthcare system, allows Forbes to pretend as if there's anything wrong w/SS.

[huply]

Looking at the whole article, the author is making the argument that the Chinese do not "invest" for monetary gain or loss, but rather use the Treasury purchases as a way to decrease their supply of dollars (a strategy necessary to keep their currency devalued, worth less than it would be if it were fairly traded without central bank intervention).

While it certainly is correct that a debtor at risk would have some concern for default, the point of the article is that (the author asserts) China doesn't particularly care for the stream of interest payments on it's bonds, or even the principal payment back at maturity, but rather the tool that the "investment vehicle" (Treasury) provides, it is China's most powerful weapon in sustaining its relatively devalued currency.

[rtkwe]

I don't fully understand the authors reasoning either but one thing that is highly misunderstood about the bonds is that a) they're not callable, meaning that borrowers can't suddenly decide that they want to get their investment back and b) China while the largest foreign national holder of US bonds (iirc) holds >10% of the issued bonds. Almost all bonds are held here in the US in things like mutual funds and by retail investors.

[aliston]

30% of treasury bonds are owned by the Fed, and in some recent auctions, the Fed has purchased as much as 90% of the new issuance. We would have a major problem if China were to dump their bonds on the market because there aren't too many buyers when you're at such low interest rates.

[aliston]

Why the downvote? I was responding to the claim the impact of a Chinese bond dump is "misunderstood" because most bonds are held in the US by retail investors and mutual funds.

In fact, most treasuries are not held by retail investors or mutual funds in the US [1]. The largest buyer as of late has been the Fed [2], indicating that when the Fed is pursuing ZIRP, there aren't a whole lot of other buyers. If China were to dump its bond portfolio, either interest rates would spike, or the Fed would have to expand its balance sheet by another trillion dollars.

[1] http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-N... [2] http://www.bloomberg.com/news/2012-12-03/treasury-scarcity-t...

[onebaddude]

>I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context.

There is constant fear that someday China (and the rest of the world) will simply lose faith in the credit of the US and stop buying bonds. In the same way that you might decide CitiGroup is no longer a good investment, and stop buying (or selling) their bonds.

But in reality, it's not like the Chinese are looking around at all the sovereign debt in the world and deciding where to put their money. They have an excess of dollars from the sale of manufactured goods to go put to use. They could spend those dollars on American made products (and they do, to some degree), but the Chinese economy isn't quite in need of most of what we manufacture yet, and they have a lot of dollars to get rid of. So they buy US bonds. It's a mutually beneficial arrangement.

I'm glad some of this is reaching the mainstream media. I'm no expert myself, but this crisis, and the past few years have revealed that when it comes to the economy, we have a very misinformed, ignorant population.

[jusben1369]

The author is stating they don't do it because they believe the US is a good place (or not) to place their money (the usual criteria you would use when deciding amongst competing choices of where to put your money) They do it as a mechanism to achieve another goal: an artificially low value of their own currency. This is so their goods look cheap(er) to other countries. That in turn keeps employment high and social unrest low. That means less resistance to one party rule.

[rayiner]

Characterizing it as a "favor" isn't helpful. It's more appropriate to say that there is more to the calculus than just the actual loan. Holding US debt has a direct benefit to China, but also an indirect benefit (it allows the U.S. to keep running huge trade deficits, which benefits Chinese manufacturing). If you look at just the return and risk on the debt, China's actions might not make sense, but if you look at the whole picture they do. At least, that's what the article is trying to get at.

[balabaster]

If anyone thinks that anyone does anything as "a favour to the United States of America", they're deluded. The only reason China (or any other country for that matter) would do a favour like this for the U.S. is that it suits their own political agenda, whatever that may be. I'd be concerned that it's for less obvious reasons then artificially subsidizing their own exchange rate.

[efalcao]

I think the author is making the point that the simple act of buying the bonds is accomplishing their goal.

They don't care what the return is, they just want to offload dollars. If you don't care about the return, then something is not an investment - the quality of the borrower (based on their ability/history of repayment) is moot.

[anoncowherd]

>> I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context.

Ignore the mainstream "Talking Heads" -economists in the media - they serve two main purposes: 1) Help Wall Street fleece unsuspecting "retail investors", and 2) Maintain the illusion that everything is alright.

Austrian Economics is right, and everything else is either wrong or meant to mislead you.

You see, you shouldn't be thinking naughty thoughts like: "Since I personally can't keep living beyond my means for ever and ever, why could any government? Don't the 'laws' of economics apply to governments?" (Hint: they do.)

Go forth and educate thyself: http://mises.org

( Oh, and ignore all the clueless pontificators on HN too )

[jusben1369]

Keynes is consistently proven to be far more accurate and effective than the Austrian school of thought. Keynes mets so much resistance because it's counter intuitive. Very literal thinkers have trouble with that and are attracted to the Austrian way of thinking.

[anoncowherd]

https://news.ycombinator.com/item?id=6572124

[brohee]

Someone let Dread Pirate Robert out?

[anoncowherd]

Downvote me all you want, but I'm right. Yes, I do realize that's not an argument.

[DanBC]

You may have been down voted for tone, not correctness.

[selmnoo]

Or both.

Austrian economics has been exposed for its various faults in the academia, a modern decent education will reliably inform one of that.

[anoncowherd]

>> Austrian economics has been exposed for its various faults in the academia, a modern decent education will reliably inform one of that.

.. And this is why I didn't bother with any arguments. I don't have all day to waste on arguing with misguided people.

But here's an idea: an economy consists of people making trades and investments etc. Each trade is affected by each person's current circumstances, ends, means and preferences, or even the mood he's in.

Did his wife die yesterday? Will that affect his behaviour in the market?

Now, the question is: How could you possibly model the behaviour of hundreds of millions of people in their daily lives with any kind of mathematical formulas when everything they do is subjective, and subject to their whims and moods?

Think about that.. and then think about whether Austrian economics has been "exposed" for anything.

[vasilipupkin]

You could model behavior of millions of people statistically - the same way we model anything with millions of data points.

[anoncowherd]

Sure, far be it from anyone not to conform to everyone else's expectations! Dreadful! :p