Question

Q4) To finance current budget deficit, US government relies on T bond sales. The significant portion(over 30%) of T bonds are purchased by foreign governments or capitalists(lately China). What is your opinion about relying on foreign debt to finance US budget deficit? If some foreign countries became unhappy about trade or political matter with US government ( of the new president, Trump) or due to lack of confidence over US T Bond and decided to cash out (sell) US T bonds they are holding, what economic consequence do you expect to be occurred?

Answer 1

            This is purely my point of view and no one will be blamed or claimed for this article.

First we will understand what is deficit financing, it means the government is trying to reduce the gap between excess spending and revenue. There many types of deficit financing, for ex. T-Bills, External debt borrowings, internal debt funding, excess printing of currency notes and etc. Deficit financing have two main objectives namely for productive and non-productive aspects. In productive they were financing for social welfare, national growth, to finance export subsidy etc. and in non-productive aspects it consists of war like situation, to maintain law and order ad etc.

            In your if we were discussing about US and its deficit financing, we have to understand the whole scenario from zero level (why US need deficit financing). If whatever is happened due to political or social issue the country need to borrow of finance for the country’s welfare. Here we assume the US financing for its Deficit through the T bonds sales, they require the finance for the smooth functioning of business and country. If US financing through T bond sells, and the major portion as you have mentioned earlier purchased by China, they will raise the finance for their business. But, the countries holding US T bonds and they were hurt by US’s new policies they will surely sell off the bonds and bring their money back. This results in huge capital flight from US, and will shows the impact on the economy. May be unemployment and recession will be the best result of that capital flight. If US’s situation like this, other countries will also fall of confidence for US. They will no longer believes that dollar will be the strongest currency. Once this is happened in the 1971 collapse of Bretton wood system, due to fall of confidence in the exchange rate of US dollar. But in this we were discussing about deficit financing. In 1971 the lack of confidence on US dollar is due to exchange rate but now in present it will occur due to capital flight, new policies by president, unhappy T bonds holding countries. It will lead to the Brand New World Crisis, and the recession will be spread all over the world like were happened in the case of Lehman brother’s crisis in 2008.