A Quick Thought Experiment

Which country has more power over us?  Is it China, who could suddenly try to sell our assets back to us at cut rate prices, thereby, uh, taking a huge financial loss for themselves to temporarily roil our markets.  Or is it Venezuela, who can (and has) simply seized all the assets in their country owned by Americans and repudiated its debts?

Not clear enough?  OK, lets go back to the cold war.  Let's say the USSR had lent our government a trillion dollars or so, thereby holding lots of dollar denominated US government debt.  Let's say they also made massive investments in US land and buildings.  Would we have said, "boy, they have us now?"  No.  I mean, hell no!  We'd have their money, they'd just hold our paper.  If the Russki's got adventurous in Afghanistan, we could just say, sorry, we are going to stop paying on all those bonds you hold until you get out.  This situation is so clear that in fact it was the USSR's strategy to do just the opposite, ie to borrow as much as possible from the west, taking western money to fund their economy while creating a threat of loan default they could use strategically.  American hawks argued that it was insane to lend to the USSR, because this gave them leverage over us. 

  • http://goodmorningeconomics.wordpress.com/ jsalvati

    One of the most wonderful effects of trade globalization is that it acts as a deterant to conflicts especially military ones, and especially when the governments involved are democratic.

  • M. Dragon

    What's the old saying?: "Owe the bank a million dollars, the bank owns you. Owe the bank a billion dollars, you own the bank."

  • http://powerandcontrol.blogspot.com/ M. Simon

    "We'd have their money, they'd just hold our promises."

    Reads better. You might also like "have" for "hold". I give hold a slight edge because it implies the paper. Plus I like "have" and "hold" tying the elements together. A second "have" may be one too many.