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Chapter 29: Problem 4

Writing in the New York Times, Simon Johnson, an economist at MIT, made the argument that people outside the United States may at some point decide to "save less (in which case they may hold onto their existing United States government debt but not want to buy so much of new issues)." What does saving by people outside the United States have to do with sales of U.S. government debt? Does the level of domestic investment occurring in foreign countries matter for your answer? Briefly explain.

Short Answer

Expert verified
Foreign individuals' savings directly impact the purchase of U.S. government debt because savings can be used for such investment. Meanwhile, when domestic investment in their own countries becomes attractive, they might prefer that instead of buying U.S. government debt. So, both lower savings and higher domestic investment abroad can reduce the purchase of U.S. government debt.

Step by step solution

01

Understanding the effect of foreign saving on U.S. government debt sales

Foreigners buy U.S. government debt as a means of investment. When people outside the United States save more, they have more money available to invest, a part of which can go into the purchase of U.S. government debt. So, if the level of savings decreases, people may not want to buy as much new U.S. government debt. They might just hold their current debt.
02

Relation of domestic investment abroad with U.S. debt sales

The level of domestic investment occurring in foreign countries does matter for this discussion. When investment opportunities increase domestically (in their own countries), people may prefer to invest there rather than buying U.S. government debt. A rise in domestic investment might lead to less purchase of U.S. government debt, especially if these investments offer a higher return.
03

Synthesis of the information

Foreign individuals' savings levels impact their ability and willingness to buy U.S. government debt, serving as a kind of investment. Meanwhile, domestic investment opportunities in these individuals' home countries compete with U.S. government debt as potential investment pathways. So, a decrease in foreign savings and an increase in domestic investment abroad might lower the sales of U.S. government debt.

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Most popular questions from this chapter

In discussing the U.S. financial account surplus, a Wall Street Journal editorial made the following observations: [Much] of it goes to finance an investment shortfall in the U.S., especially government borrowing. Yet Americans are making millions of individual decisions about how much to save, and foreigners are not forcing Washington to borrow. If government weren't gobbling up that capital, more of it would go into the private economy. a. What does the editorial mean by an "investment shortfall in the United States"? In what sense does a financial account surplus finance that shortfall? b. What does the editorial mean by asserting that if the government weren't "gobbling up that capital," it would go into the private economy? c. Is there a connection between the federal budget deficit and the financial account surplus?

What is the saving and investment equation? If national saving declines, what will happen to domestic investment and net foreign investment?

What is meant by a policy channel?

(Related to Solved Problem 29.1 on page 1034 ) An article on the Dow Jones Newswire in mid-2017 contained the following sentence: "The U.S. current- account deficit, a measure of trade and financial flows with foreign countries widened to \(\$ 116.78\) billion in the first quarter." Does a country's current account include any financial flows between that country and other countries? Does it include all financial flows between that country and other countries? Briefly explain.

Section 29.4 states that "the budget surpluses of the late 1990 s occurred at a time of then-record current account deficits." Holding everything else constant, what would the likely effect have been on domestic investment in the United States during those years if the current account had been balanced instead of being in deficit?
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