Why do foreigners buy US debt?

To avoid an off-topic smackdown in the comments section of the previous post, I’m posting my opinion here on why foreigners buy our bonds.

There’s much fuss, paricularly on the Left, that selling our debt overseas (i.e. selling bonds to foreigners) is a recipe for disaster. (Here is one example of leftist economic fearmongering.) The claim is that we are mortaging our children’s economic future. I don’t buy it, and here’s why.

1.) First, the quanity of the debt is rarely properly calculated. As a percentage of GDP, our debt has been bigger. We aren’t in as nearly as much debt as Italy, Canada, and Japan. On the fact that our debt has never been higher: so what? With inflation, wealth expansion and all the rest, it’s percentage of GDP, not actual amount, that matters.

2.) Tom Barnett’s analysis of US debt speaks closest to my view of the world. That China owns close to $1 trillion in treasury securities doesn’t seem a big deal to me. In fact, I agree with Barnett that this is just a transaction, and should be seen for what it is. One motive for China to purchase our bonds is to keep our military guarding the sea lanes. We are the policeman of the global economy, and plenty of interested parties—Japan and China being the two big ones—buy our bonds to support us. To paraphrase Mr. David Schuler’s rhetorical question from the previous post, we defend the sea lanes that keep East Asia’s energy supply lines and goods export lines open.

3.) What the “globalization” of the world economy really means is that many, many countries—from Japan and China to Southeast Asia to Latin America—merely provide goods for US consumption. There is very little widespread integration: remove the US and globalization dies. This means that the prosperity we see outside of the West is predominately based on Americans buying foreign goods. Were we ever to stop, much of the world would face a big, big problem (the devaluation of the dollar is one strategy of the Bush Administration to ween the world off our consumers and let Europe do the buying for a while). That is one reason why China and Japan buy our debt: they want us to keep buying their stuff!

4.) Contrary to what aforementioned fearmongers say, this does not mean we are “owned” by East Asian bankers. Far from it. Indeed, if China decides to invade Taiwan, we can suspend interest payments on those bonds, or even cancel them, as punishment for bad behavior.

5.) One more thing—US bonds are a steady, reliable investment!

Comments and rebuttals—and I know that Saru is chomping at the bit here—are most welcome.

EDIT: While Saru bides his time as he number-crunches and drafts his comment, Dan at TDAXP has an excellent graph comparing US debt to other nations. (The only factor not shown is the not unimportant fact that the US’s debt is held by foreigners, whereas most national debt is held domestically.)