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Thread: Strong Dollar and cashing out creditors

  1. #1

    Strong Dollar and cashing out creditors

    With the dollar strong and getting stronger, can we (or should we) pay back China, etc. and reduce the debt? Trying to learn if a strong dollar is a positive or negative regarding debt held by foreigners who's currencies are weaker than ours...



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  3. #2
    The US debt is still priced in dollars- no matter who owns it. Exchange rates have no impact on it.

    To reduce the debt, you need first take in more money than you spend- taxes greater than government spending. Then you can use that money to reduce the debt. In China's case, you need to have an extra $1.2 trillion lying around. The only other way is to "shift debt"- to borrow more money from somebody else to pay off a creditor. In that case the total debt doesn't change- just who it is owed to.

    With a roughly $4 trillion budget and again a very rough $500 billion deficit, you could raise taxes by $1.7 trillion- the $500 billion to balance the budget plus $1.2 trillion to give to China- (a 50% increase from what they are now) or cut 42% of the budget including Social Security and Medicare/Medicaid and the Department of Defense (the biggest budget items).

    It further assumes that China would like to sell their US debt. Selling the US debt would mean their currency would soar against the dollar (because those dollars would then be converted into yuan)- making their exports very expensive so our demand for their goods would fall- hurting their economy.

    What it does impact is trade. As in the above example, a stronger yuan (or a weaker dollar) makes their exports to us more expensive. A stronger dollar makes their exports to us cheaper so we may demand more of them (at the expense of producing goods here) and the will demand fewer goods from us (also hurting our export producers). Strong dollar means cheaper goods but fewer jobs. That is why Europe and Japan like weaker currencies right now. It encourages more jobs there.
    Last edited by Zippyjuan; 03-27-2015 at 07:23 PM.

  4. #3
    As Zip has pointed out , nothing changes until things get much worse.

  5. #4
    If we'd to make a generalization then we could say that a stronger currency is generally a negative thing with regards to government debt of that country, & that's one of the biggest reasons why governments like weaker currencies as it allows them to dilute their debt. A stronger dollar means that Americans are able to get more bang for their buck, in fact, that holds for anyone who's holding dollars, including those holding U.S. debt.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman



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