Committee for a Responsible Federal Budget

What Happens If China Stops Buying Our Debt

Apr 26, 2011 | Economics

Megan McArdle at The Atlantic writes about what happens if China stops buying U.S. Treasury bonds. She points out that a fiscal crisis is unlikely to be foreshadowed by signs such as a gradual rise in interest rates or other countries merely slowing down lending. Rather, citing the studies of Carmen Reinhart, she argues that changes would be much more precipitous.

According to economist Carmen Reinhart, who has made an intensive study of crises, there's no reason to expect the change to be orderly and gradual. She says the lesson of history is pretty unequivocal: interest rates are not a good predictor of who is about to tip into a crisis. People are willing to lend at decent rates, until suddenly they're barely willing to lend at all.

When you look at how much of our debt comes due by the end of 2012, it's easy to see how fast higher interest rates could turn into a real problem for us. To be sure, we're no Japan--but that's not necessarily a happy thought, because Japan finances something like 95% of its debt from its pool of thrifty (and nationalistic) savers. Their stock of lenders probably isn't going anywhere. Ours might.

 Read the full post here.