Monday, April 26, 2010

Not All Debt Is Created Equal

FLG is reading this book:
Subprime Nation: American Power, Global Capital, and the Housing Bubble

The author makes a point that FLG'd never really considered -- yes, the US owes the world an ever increasing amount of money, but oddly over the past twenty or so years we've paid less out in returns than we've received. The author argues that this is a result of US power, not weakness.

To simplify -- we take in money from abroad and it goes into low interest T-bills. We then recycle the money through the system and buy back foreign equity and corporate bonds. So even though we are more in debt to the rest of the world than they are to us, our payments on that debt to the world are actually smaller than they pay us. The big thing, according to this argument, is not the debt, but whether other countries take the dollars we've shipped them and instead of investing in T-bills shift to buying equities in sovereign wealth funds.

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