[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.