Krazy Kaju said this recently in a the forum:
The idea that government fiscal stimulus can increase actual aggregate demand is false. That money needs to either be borrowed, taxed, or printed. If it's borrowed, that's less money that the private economy may borrow. If it is taxed, that is less money that the private economy has. If it is printed, that is less value per dollar that the private economy has.
My question is, is it any better or worse if Treasuries (the security through which government borrows) are bought by foreigners versus domestic investors? Is the result the same in terms of crowding out private investment?
I think a blurb from a recent Shostak article "Can Fiscal Stimulus Revive the Economy?" is also related:
Various individuals who will be employed by the government will expect compensation for their work. The only way it can pay these individuals is by taxing others who are still generating real wealth. By doing this, the government weakens the wealth-generating process and undermines prospects for economic recovery. (We ignore here borrowings from foreigners.)
Why is Shostak ignoring borrowings from foreigners? What if borrowings from foreigners aren't ignored?
Thanks!
My guess is that borrowing from foreigners will show some improvments in statistics, however... What will happen next year? You pile more and more debt and use that money in unproductive ways (building bridges to nowhere and paying money to beaurocrats). Next year, when interest and part of the principal is due, you have to cut your consumption to pay back your debt. You have merly transferred your future consumption to present. You may borrow each year more and more money, however that makes lenders a kind of a fool. It's bound to stop sometimes.
Also, borrowing substential amount of money by government from foreigners will remove that funds from private sector (they can borrow that money too).
There are a number of issues.
First, as Azazel rightly pointed out, is the need to make interest payments nonetheless. If you do not keep up with payments expect appetibility of your debt to drop dramatically.
Second is merely political. While you can force your own citizens and banks to buy debt, how about foreigners? You can threaten them with either embargoes or armed retaliation but, again, appetibility of your debt would drop dramatically. Imagine how Uncle Sam's already tarnished reputation would improve if he threatened the Chinese with nuclear armageddon should they fail to buy more T-bonds.
Third: there are plenty of "competitors" out there. We all know that debt rating is not worth a Continental, so you need to entice foreigners to prefer your debt over other nations'. You need to pay better interests and you must give solid guarantees that you will pay interests on the nail or, even worse, you won't default your debt no matter what.
Fourth. Politics again: it's well known that Chinese bought so much US debt because they needed an outlet for their foreign currency reserves, they wanted more political weight and they wanted to help out Uncle Sam keep a lifestyle he wouldn't be to afford otherwise because guess where all those LCD TVs and designer clothes are made? Other countries may choose to buy US debt to strenghten their bonds with that country and live under the US nuclear umbrella, metaphorically speaking.
Fifth. What if you default your foreign debt? You can send police to beat the living Hell out of your unruly citizens should you default your own debt since you took special care to make gun ownership a nightmare but what about foreigners? What if China threatens an economical embargo or the Arabs say they will cut your European allies of their oil if you default?
Yes, it's time for the Dr Goebbels show!
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