By importing stuff and exporting dollars, those foreign entities end up with a need to do something with those dollars. They could leave them in a safe, or recycle them into something else. Voila, the US Treasury offers them some interest if they trade those dollars for T-bills. And the T-bills are issued to fund the newly expanded federal debt.
The US gov't is running a cash flow deficit of about 6-700 billion a year. If they didn't have a captive audience of trading partners who keep accumulating 60+ billion dollars a month, then they'd have to raise treasury rates significantly in order to attract capital that could just as easily go anyplace else. Indeed, they might decide not buy any treasuries at all. So in effect, the trade deficit hugely subsidizes the federal overspending. And consumers, by helping to grow the debt berg, are powering the trade deficit.
As it is, foreign entities don't *have* to fund the deficit, but if not, they'd have the problem of what to do with all those dollars. Instead they could buy up companies, raw materials, gold, etc. And much more of that has been happening lately, as Russ had documented very nicely with his blog -- not necessarily what they are buying, but the decline in Treasury purchases.
--Ben |
