Do Recessions Internalize the National Debt?
We all know that economic uncertainty sends money into Treasuries and another forms of government debt, but I’ve been wondering, what does it do to our trade balance. Recessions reduce our consumption, and naturally our imports, but I’m thinking now that post-recession bankers and institutions own more treasuries as a percentage and by dollar than foreign nations.
Benefits of Recession
It is rare that anyone touts a benefit to recession, but there are certainly quite a few. Companies become more efficient, even if it means jobs are lost. The price of everything from pizzas to cars become cheaper. Debt levels fall off a cliff, and a nation as a whole relearns the benefits of actually saving for the future. But there might be another hidden benefit, our national debt becomes internalized.
Debt and Trade
The United States operates a trade imbalance that sends hundreds of billions of dollars overseas each year. Much of this differential is due to consumption in both energy and consumer goods, but some of it has to do with our debt loads as well. With a national debt now topping $12 trillion, and servicing that costs as much as $480 billion per year, it plays an important piece of our trade puzzle.
Internalizing Debt
A national debt isn’t such a horrible thing if the lenders reside in the borrowing nation. For instance, if the whole of the national debt of the United States was owned by American creditors, the interest payments would stay in the United States. Of course, we know this isn’t entirely true. China, Japan and many middle eastern nations own the bulk of our national debt. Each year, when we go to make interest payments, the money flows overseas.
Institutional Debt Owners
Recently, US based investment banks and institutions started buying US debt out of fears of a global recession. This money, which is partially American and international cash, helps keep our national debt woes inside our own borders. I think it’s excellent, and just might be yet another (hidden) benefit of recession.
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