Re: China: controlling interest in US T-bills?

On Mon, 07 May 2007 16:46:19 -0400, Vince <firelaw@xxxxxxxxxx> wrote:

PaPaPeng wrote:
On Mon, 7 May 2007 10:23:01 -0700, "Shawn Wilson"
<ikonoqlast@xxxxxxxxx> wrote:


I have already read more than enough international monetary economics course
work, thank you.

If you imagine that people would pass up the chance to by US T-bills at a
discount, then you have more imagination than I do.



First US T-Bills are in denominations that only banks and governments
can afford to hold.

nonsense

they sold in increments of $1000

http://www.treasurydirect.gov/indiv/research/indepth/tbills/res_tbill.htm


Vince

Point conceded. The instrument referred to by the OP should have been
Government Bonds. My description of foreign government holdings in
USD should have referred to Bonds. Governments buy bonds in million
dollar denominations. The administrative costs of thousand dollar
T-Bill denominations would have been prohibitive. Furthermore the FED
would separate domestic "consumer" debt, your mom and pop kind, from
national debt held by foreign governments if only to protect these
investments from speculative manipulation. If it is called as some
other instrument tell us. The kind of instruments foreign governments
buy won't be the kind any individual's pocketbook can handle. And
this is the kind of holdings that the OP is worried about (controlling
the US economy at your individual level).

WIKI: http://en.wikipedia.org/wiki/Government_securities

Government debt (also known as public debt or national debt) is money
(or credit) owed by any level of government; either central
government, federal government, municipal government or local
government.

As the government represents the people, government debt can be seen
as an indirect debt of the taxpayers.

Government debt can be categorized as internal debt, owed to lenders
within the country, and external debt, owed to foreign lenders.
Governments usually borrow by issuing securities such as government
bonds and bills. Less credit worthy countries sometimes borrow
directly from commercial banks or supranational institutions. Some
consider all government liabilities, including future pension payments
and payments for goods and services the government has contracted for
but not yet paid, as government debt.

A government bond is a bond issued by a national government
denominated in the country's domestic currency. Bonds issued by
national governments in foreign currencies are normally referred to as
sovereign bonds. Government bonds are usually considered risk-free
bonds, because the government can raise taxes, reduce spending, or
simply print more money to redeem the bond at maturity. Investors in
sovereign bonds have the additional risk that the issuer is unable to
obtain foreign currency to redeem the bonds.

Municipal, provincial or state bonds
Further information: Municipal bond
Municipal bonds or "munis" in the United States are debt securities
issued by local governments (municipalities).


Denominated in reserve currencies
Governments borrow money in a currency for which the demand is
strongest. The advantage of issuing bonds in a currency such as the
euro or the US dollar, is that the universe of investors for the bonds
is very large. Countries such as the United States, France and Germany
have only issued in their domestic currency. Relatively few investors
are willing to invest in currencies that do not have a long
track-record of stability. The disadvantage for a government issuing
bonds in a foreign currency, is that there is a risk that they will
not be able to obtain the foreign currency to pay the interest or
redeem the bonds. In 1997/1998, during the Asian financial crisis this
became a serious problem when many countries were unable to keep their
exchange rate fixed due to speculative attacks.


Risk
Lendings to a national government in the country's own sovereign
currency are often considered "risk free" and are made at a so-called
"risk-free interest rate". This is because the debt and interest can
be repaid by raising tax receipts (either by economic growth or
raising rates), a reduction in spending, or failing that by simply
printing more money. Some economists argue that, in an economy near
the full employment, this would increase inflation and reduce the
value of the invested capital. An extreme example of this is provided
by Weimar Germany of 1920s which suffered from hyperinflation due to
its government's inability to pay the national debt.

A politically unstable state is anything but risk-free as it may,
being sovereign, cease its payments with impunity. Famous examples of
this phenomenon are the Spain of eighteenth century which nullified
its government debt seven times during a century and revolutionary
Russia of 1917 which refused to accept the responsibility for Imperial
Russian debt. Another political risk is caused by external threats. It
is most uncommon for invaders to accept responsibility for the
national debt of the annexed state or that of an organization it
considered a rebellion. For example, all debts taken by Confederate
States of America were left unpaid after the American Civil War.

U.S. Treasury bonds denominated in U.S. dollars are often considered
"risk free" in the U.S. but this ignores the risk to foreign
purchasers of currency exchange rate movements. In addition, this
implicitly accepts the stability of the US government and its ability
to continue repayments in a difficult financial crisis.

Lendings to a national government in a currency other than its own
does not allow for the same confidence in the ability to repay but
this is offset somewhat by reducing the exchange rate risk to foreign
lenders. On the other hand, national debt in foreign currency cannot
be disposed of by starting a hyperinflation, which increases the
credibility of the debtor. Usually small states with volatile
economies have most of their national debt in foreign currency. For
countries in the Eurozone, the euro is the local currency, although no
single state can trigger inflation by printing more money.

Lendings to a local or municipal government can be just as risky as a
loan to a private company, unless the local or municipal government
has the power to tax. In this case, the local government can escape
its debts by increasing the taxes, or reduce spending, just as a
national one. Local government loans are sometimes guaranteed by the
national government and this reduces the risk. In some jurisdictions,
interest earned on local or municipal bonds is tax-exempt income,
which can be an important consideration for the wealthy.


[edit] Clearing and defaults
Main articles: clearing (finance) and default (finance)
Public debt clearing standards are set by the Bank for International
Settlements, but defaults are governed by extremely complex laws which
vary from jurisdiction to jurisdiction. Globally, the International
Monetary Fund has the power to intervene to prevent anticipated
defaults. It has been very heavily criticized for the measures it
advises nations to take, which often involve cutting back essential
services as part of an economic austerity regime. In triple bottom
line analysis, this can be seen as degrading capital on which the
nation's economy ultimately depends.
(more)

.

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