econ question

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$

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

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.

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.

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.

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.

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