The foreign countries such as China, Japan, etc. sell much more goods and services to the U.S. then they buy from us so they take the surplus dollars (IOUs) and they just pile them into their banks. The banks cannot just leave them lying around so they invest them in American treasuries or (Wall Street) corporate stocks and bonds so they can earn some interest. The foreign banks have so many American IOUs to invest compared to the treasury bonds available that the demand drives down the interest rates on these bonds to very low levels. (When the sub primes went bust in 2008 there was a run on treasuries that drove the interest rates down to near zero.) This makes the interest burden for America comparitively cheap even though there are trillions of these American IOUs spread out all over the world.

The foreign countries are in a dilemma. What can they do with all this American debt (IOUs) that they own? Well they can buy American treasuries or goods, or corporate stocks and bonds or real estate or they can sit back and collect the interest on the treasuries (which is now very low) or they can redeem the bonds. If they turn their treasury bonds in, our government will be forced to give them our dollars back so now they will again have their banks full of these non-interest paying American IOU dollars again.

What a dilemma for the foreigners! The foreigners lost their shirts in real estate market in the 1980s and now Wall Street wiped out trillions dollars of foreign debt in the latest stock market crash and subprime real estate bond fiasco. (Iceland lost so much money the country nearly went bankrupt.) Maybe the best thing the foreigners could do is just buy American goods. At least they will get something tangible for their money.

The best thing, we in America can do is to buy as many foreign goods as we can and pay for them with dollars. By doing this we can keep the demand for our treasury bonds (exchanging dollars for treasury bonds) as high as possible thereby keeping the rates extremely low. This keeps the whole world busy manufacturing and selling their goods to America and it also keeps America busy making goods and selling to the "dollar rich" foreign countries. (When America stops buying the whole world goes into a depression!)

This is happening right now, the world economy is slowing because of the American slow down in purchasing foreign goods. The main thing for America to do is to try to limit the amount of T bonds available compared to the supply of dollars available. This keeps the demand high and the supply low. This keeps the treasury bonds interest rates as low as possible.

Donald Hamilton   See also - The Capitalists

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