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Why foreigners are propping up U.S. debt, and why we need them
Mercury News/AP
December 10, 2005

NEW YORK (AP) - It's an addiction. Every day, the United States sucks in more and more money from abroad, to keep the nation going.

At our current rate of trade and budget deficits, foreigners need to purchase $2 billion in dollar-denominated assets each day just to keep the dollar stable, said Axel Merk, who manages $60 million at Merk Investments and runs the Merk Hard Currency Fund.

More than half the national debt is now financed by foreigners, according to Roger Ibbotson, chairman of financial consulting firm Ibbotson Associates in Chicago and a professor at Yale School of Management. That's been true since 1980, but the difference now, he says, ""is the scale of the game."

""I guess everyone wants to keep this game going," Ibbotson said. But if one of the countries we're most dependent on drops out, it could be ""like a bank run."

Foreign investments in U.S. bonds and equities set a record in September, the last month for which data is available.

Foreigners bought $1.01 trillion in U.S. securities in the 12 months ending in September, up from $866.6 billion for the same period in 2004, according to U.S. Treasury International Capital, which tracks foreign purchases of U.S. securities.

Why did foreign investors' interest in the United States intensify?

For one thing, investors can get a better return on U.S. bonds than they can in their home countries. Yields in the United States have been near 4.5 percent, while yields on euro bonds are closer to 3.2 percent and yields on Japanese bonds are near 1.5 percent.

Second, our massive trade deficit has sent tens of billions of dollars abroad, as imports increased while exports declined, which has helped foreign business owners sock away plenty of dollars.

Then, there's our personal savings rate, which has been hovering near zero.

""We need the money because we're not saving any," Wyss said. ""We need it from anyone who has a spare yen to lend us."

Commentary:
Since the Reagan tax cut in 1981, our debt went from less than $1 trillion to over $8.1 trillion. No other generation has been as irresponsible as this. Under Bush alone the debt has soared $2.4 trillion (the same amount created from 1789 - 19870.