Your credit card analogy is fairly accurate in my understanding (or misunderstanding as the case might be) of the national debt.
In terms that I can understand here is an example of how I think it goes: China manufactures goods that are sold to American businesses. China is paid in dollars. China uses the dollars to buy bonds from the US Govt. The US Govt. pays interest on the bonds. The bonds are also sold to anyone else in the world who wants to buy them. There is not really any other option for dollars, no real competition as the US is still the safest place to reinvest. The US Govt's access to the bond funds fuels spending and the US economy in general. The cycle repeats and feeds upon its own success.
The reason that it is able to feed on that success is that there are real things backing those bonds.
The fear to me is what happens if the above cycle stops? To me it is like flipping houses - I buy a house and sell it to Joe and make 10%, Joe sells it to Bill and makes 10%, and on and on. Everyone makes money on the action even though nothing of value has been made or added until finally someone realizes that the house is not worth that much and won't buy it. This leaves the last guy holding the bag and he goes down.
It's really not like that though. It is not a speculative bubble. The US economy is real, and it is huge. It may be underperforming what it could do, But that underperforming is a fairly small percentage of the total activity. It is not like buying and selling the same thing over and over again for an ever higher price.
The US imports, and pays for that in dollars. The exporters we buy from use a portion of those dollars to buy US bonds. But the bonds and the trade deficit aren't really related. The trade deficit is mainly about the fact that US companies don't want to invest in the US because they don't want to pay high wages, and so the nation has a harder time competing in international markets. The budget deficit is mainly about the US government does not want to tax, nor does it want US companies to invest. So the economy remains weak and the population remains more dependent on the government for subsistence.
But the economy does keep chugging along. And it does keep creating all the wealth the US actually needs to consume as it does and pay the debts. We are just allocating it poorly because of politics. The rate at which foreigners are willing to buy our bonds remains strong, because they can see that all of our problems are political, and not economic. And so they don't really worry too much about it.
I believe the low interest rate is bad in that it discourages savings and responsibility and promotes leaving beyond your means. I personally pay cash for everything I own and am debt free. My land and farms were paid in cash as will my house when it is constructed next year. This to me is security, no matter what happens I have real stuff. If instead I borrowed I'd be living large but if anything went wrong I'd be overextended and crashing. I get penalized by the tax code and inflation for being what I consider to be fiscally responsible. If I borrowed I could pay off today's debts tomorrow with dollars that are worth less than they are today.
Interest rates are the cost of capital. When you borrow, you pay beck the principle, plus the interest. High interest means the cost of capital is high. The cost of borrowing is high. What that means is that less borrowing will take place, and those borrowers who do borrow will be under much more burden and more likely to default on their debts. Borrowing fuels economic expansion. Most borrowing is business or durables, not consumption. If you raise the costs of borrowing, you reduce the amount of borrowing, and this causes the economy to be weaker. So there is less real wealth being created to fund how much we consume. And so we have to consume less.
What that does is means that the government debt will go up. Because cutting spending never really works, and we will spend more money on interest on the debt. This gives a huge windfall to those who lend money, and does it by making those who borrow money much worse off. It is a huge transfer of wealth from borrowers to savers. From the poor to the rich.
But it won't increase savings to raise interest rates. One of the things that caused the housing bubble is that Americans, the majority of them now, are too poor to save. By keeping the economy weak and wages low, savings are caused to be low. You cannot increase savings by weakening the economy.
The dollars are being created at the Fed and the banking system with the quantitative easing policies. This flow of cheap dollars fuels the rise in the market even though nothing real is actually being produced, just the action on the prices. When this stops there will be consequences.
Quantitative easing is the wrong tool to fix what is wrong with the US economy. If you want less debt in the long run, then it is necessary to fix the economy first. End high unemployment and low wages first. After you have done that, reducing government debt is easy. Before you have done that, reducing government debt is the next thing to impossible. We are using QE rather than sound economic principles, because Congress refuses to act responsibly, and keeps insisting that the debt now is the problem. But if we used neither, then the economy gets a lot worse, and debt gets a lot worse.
If you stop QE, then government deficits will go up.
With China and the debt what happens if they want to be paid back the principle instead of just the interest? Is that possible? If it were to occur where would the dollars come from?
Not possible. There is no legal basis for them to make that demand. We would simply ignore it. The bonds are paid when the bonds are due, and not before.
Please tell me where I am off base in my understanding as this is a subject I am woefully ignorant in.
I hadn't thought of it that way. I hope so....
