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econ question

The following is a portion of a recent article by Paul Krugman in NY Times.

"The dollar began falling about a month ago. So far it's down less than 10 percent against the euro and the yen, but there's a definite sense that foreign governments, in particular, are becoming less willing to keep the dollar strong by buying lots of U.S. debt."

I don't have much knowledge in econ, so could someone explain:

1) what it means for foreign governments to buy U.S. debt 2) in what form the U.S. debt is when a foreign government buys it

I couldn't find a good place to post this question, so please forgive me.

Thanks

- David

Reply to
Loitering Dude
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To hold a Debt Instrument that is payable in US$, The foreign entity uses their currency (i.e exchanges it) to buy a US$ debt instrument. If the exchange rate of the US$ is falling then they will receive fewer $ of their own currency when they convert back from US$. So you only want to hold US$ when it is stable or appreciating.

Any debt instrument, could be Goverment bonds or treasury bills, private mortgages, bank notes, corporate bonds or commercial paper, held long term or as short as overnight ...etc, etc basically any amount due payable in US$

Reply to
David Smith

First, you can ignore virtually everything Paul Krugman writes. Best I can tell, he's a) Never been particularily correct, and b) Refuses to correct out-and-out misrepresentations. You can check out the "Krugman Truth Squad" at

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or a Google search of "krugman+truth" yields over 3 million hits. Enjoy. No, best to ignore Krugman.

Reply to
HeyBub

And if you're China and hold lots of US debt you could turn around and say either you can your criticism of our human rights abuses or we will call your debt.

And China has a miserable human rights record.

Reply to
Barnabas Collins

The USD is still the currency of the oil market, and if you're running a massive trade surplus with the USA, you've got to do something with all those USD. Part of the fun when you've got *really* big holdings is that you can rig the forex markets. There were stories about the Kuwaitis doing just that before Gulf War One.

I don't think a *government* is going to be interested in private mortgages etc - they're for institutional investors.

Reply to
Paul Danaher

I'm not sure you know how they are sold. It isn't one mortgage at a time, but a portfolio of them together, such as all the January '06 30 year mortgages from Washington Mutual. Such a portfolio might not be big enough to interest a government looking to invest $10B but combined they aren't small potatoes either. Then again a foreign government isn't likely going to be able to invest $10B into US Treasuries either.

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Reply to
Golden California Girls

Reply to
Paul Danaher

Guarantee? Funny I didn't see any guarantee on those Saddam Hussein Iraq bonds? Heck I don't see any on US Treasuries either, even though they are considered the least risky investment around. There aren't any meaningful guarantees on debit instruments. The only thing is the ability of the issuer to pay back. With a package of mortgages you know some will fail and you know how many from past history. Not hard to figure out the real value of the investment. That's why subprime loans cost much more.

The US government is one of the larger buyers and sellers of mortgages, they even are in the business of guaranteeing them.

Reply to
Golden California Girls

Actually, they aren't quite. One of the interesting things about Fannie Mae is that the US government *doesn't* guarantee them ...

Reply to
Paul Danaher

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