...While foreign investors were putting up most of the $1.5 trillion the federal government has borrowed since 2001, they were also snapping up hundreds of billions of dollars in private sector securities, transactions that have been a big source of the easy money that allowed Americans to borrow heavily against their homes.In How to Fix the Global Economy (3 Oct) Joseph Stiglitz wrote:
The result... is that for the first time in at least 90 years, the United States is now paying noticeably more to foreign creditors than it receives from its investments abroad.
China knows well the terms of its hidden “deal” with the United States: China helps finance the American deficits by buying treasury bonds with the money it gets from its exports. If it doesn’t, the dollar will weaken further, which will lower the value of China’s dollar reserves (by the end of the year, these will exceed $1 trillion). Any country that might benefit from China’s loss of export market share would put its money into a strong currency, like the euro, rather than the unstable and weakening dollar — or it might choose to invest the money at home, rather than holding more reserves. In short, the United States would find it increasingly difficult to finance its deficits, and the world as a whole might face greater, not less, instability.Stiglitz suggests that, drawing on ideas from Keynes, a new reserve system based on a new international currency, could help stabilise the world economy.