Author:
peles economist
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Date Posted: Thu, Oct 16 2008, 12:05:16pm
Bro larsen, you are right, that China has recently stepped into the lime-light, financing US budget deficits. Traditionally Japan used to finance US budget deficits.
A layman might asked how this process works. Lemme explain that in here. When US government runs into budget deficits, it can either print money, or sell US treasury bonds to finance its budget deficits. Most often the US government issues treasury bonds to raise money to finance the deficit. When the trasury bond is in the market, anybody from the world can buy the bond either through primary or secondary markets.
Since Japanese government previously were running current account surpluses and the per capita income of Japanes was high, domestic savings was also high, consequently led to high investment offshore, mostly US treasury bonds. I believe thats whats happening with China now, given high economic growth and high per capita income. The Chinese people are currenly financing the huge budget deficits.
Just yesterday, i heard that the budget deficit for US government was a record high at 3-percent of GDP or around 600 billion US dollars. This has to be financed by other countries who are doing well, and i guess China and South American countries who are doing well so much would finance this deficit.
As for the bail-out, and the subsequent effect of that on the government coffers can have rippling effects on the world economy and i wont be surprised, if rates started to tumple as investment fund chase after low-risk financial assets.
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