Coyote Blog

Don Boudreaux has a post I would call "How I stopped worrying and learned to love foreign ownership of US assets."  He's the economist, so I refer you to him for the real arguments.  I just want to offer this thought experiment.  Consider two countries.  In the first country, call it Venezuela, US individuals and companies have billions of dollars of investments in Venezuelan assets, with little Venezuelan capital invested reciprocally in the US.  In the other country, call it China, the Chinese government and other private groups hold billions, perhaps trillions of US dollar denominated securities and US domestic hard assets. 

Which country has more power over us?  Is it China, who could suddenly try to sell our assets back to us at cut rate prices, thereby, uh, taking a huge financial loss for themselves to temporarily roil our markets.  Or is it Venezuela, who can (and has) simply seized all the assets in their country owned by Americans and repudiated its debts?

Not clear enough?  OK, lets go back to the cold war.  Let's say the USSR had lent our government a trillion dollars or so, thereby holding lots of dollar denominated US government debt.  Let's say they also made massive investments in US land and buildings.  Would we have said, "boy, they have us now?"  No.  I mean, hell no!  We'd have their money, they'd just hold our paper.  If the Russki's got adventurous in Afghanistan, we could just say, sorry, we are going to stop paying on all those bonds you hold until you get out.  This situation is so clear that in fact it was the USSR's strategy to do just the opposite, ie to borrow as much as possible from the west, taking western money to fund their economy while creating a threat of loan default they could use strategically.  American hawks argued that it was insane to lend to the USSR, because this gave them leverage over us. 

The notion that China holding billions of American government and corporate paper gives them a substantial power imbalance over us is just silly.  Granted it makes conflict expensive for both us and the Chinese, just as all trade and global private interaction does.  Which is a good thing.