Money Flows

In order, the three largest purchasers of US debt (US Tbonds) are Japan, China, and American financial institutions. Each purchaser has a different reason for buying the bonds, but the fact remains that there is high demand for American debt and therefore the interest rates will stay low for some time.

However, as Kenneth Rogoff (former head of the IMF and current Harvard professor) points out, America's ability to show these entities that it will be willing to pay back the debt is very important. As the BBFiles has pointed out several times, America can afford to be many times more in debt than it is right now. The question is how efficient is the new debt that we are accruing?

When Bush went into debt $500 Billion a year unemployment plummeted to 4.5%! Investment and growth was high and the interest rates we paid on these loans were very low. Obama has a different problem though. With Bush's tax cuts about to expire in the middle of next year, Obama almost necessarily has to let them expire just to show the rest of the world that we are willing (they know we are able) to pay back the debt with out having the value of their investment plummet!!

So, while Conservatives are criticizing Obama next year for increasing government control, loyal BBFile readers will know that it has more to do with America's debt confidence than it does politics!