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Comment by newt0311 | Hacker News Reader

No. This is the classic sign of a bubble in US govt. securities. One thats been building up for decades. The redesign will come when the Chinese decide to use all this US debt to by US property. They can already buy several Fortune 500 companies outright. Thats going to become more and more prominent. If we are lucky, they will succeed. If not, something, either falling value or the US govt. will interfere sending the value of the dollar into a tailspin at which point, you can welcome Russia 2.0.

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The "bubble" has only been building since Jan 2001 (guess what happened then?) See http://en.wikipedia.org/wiki/File:USDebt.png. It's clear that if Clinton's policies were extended, the public debt would have gone close to ~0.

US debt is just government bonds, etc. The US govt holds China's money, and promises to pay the interest on those bonds when they mature. China owning US bonds actually makes it harder for them to purchase companies and properties in the US (they have a limited amount of free capital). If anything, the Chinese would avoid buying US companies - they would much rather concentrate on building up their own companies.

The Chinese have a few 100 billion dollars invested in US bonds (a tiny fraction of US GDP) mostly because it is a very safe investment. Why is it so safe? Literally, the only reason is that the US can print more money to pay back its debt. US bonds are the safest place to keep money because the US has proven to be such a stable country. Worst case scenario (other than the US collapsing, which is not likely), is the government will print more money and devalue the dollar.

US debt != US govt. debt.

The bubble started sometime in the 1980s when it became clear that the US was unlikely to ever run a trade surplus. Its been inflating ever since.

Also, bonds are just a proxy for cash. There is effectively no difference except the bonds get interest. Banks are not an option because any cash over $250,000 will have little guarantee. If China ever wanted to purchase US companies, the US govt. securities market would be more than happy to exchange the bonds for hard cash. Also, why would the chinese avoid buying US companies once their economy stabilizes and goes down from the double digit growth? They will buy whatever is most efficient and with their abundance of capital, that may be mean greater investment in American and European stock-markets.

Also, being able to print more money does not make an investment safe. It makes it crap. Read the last sentence you wrote. The key phrase is "devalue the dollar." What exactly is a devalued dollar worth? you tell me but it's not much and it's certainly low enough to wipe out the investment. US bonds are a safe place keep capital because the US government has a reputation of maintaining currency values and honoring debt. A reputation that is more and more divorced from reality as time goes on. Remember something: money != wealth. Also the Chinese government has a few 100 billion (which by the way is not an insignificant amount, have you ever had even a billion to spend? I wish I did.). The Chinese public also has a lot of capital floating around and when considering the country, that capital must be counted.

In the chart I linked to, "public debt" is US govt debt. My comment still stands. I won't argue with you that the situation doesn't suck (of course it does), but I will argue that the situation is not dire - the chart I linked to shows that current debt/GDP is around the median since WWII, and it has never been a serious problem before. I will also argue that there is no risk of China taking over the US, at least anytime soon.

Update: A way to make sense of this is that China is making a massive bet on the future of the US. Namely, they are assuming that the US will continue to be rich which will maintain the value of US securities which can eventually be cashed out for tangible goods and services. The problem is that the future of the US is dependent in a large part on what the world thinks of it. Thus the catch-22. As long as everybody thinks that the US is rich, they can trade on that. Note that this is just another symptom of a bubble and when this one bursts, its going to make the great depression look like good times.

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