Another way to think of it is that China would be giving us $1trn worth of stuff for only the cost of servicing that $1trn of debt (remember to subtract inflation). Does that make us or them poorer? Think carefully.

It really depends on what we use it for, what strings are attached to the money besides interest (official or otherwise), how that would affect our credit rating / percieved value of the dollar with other countries, our effectiveness in spending that money, etc. I’d submit that it isn’t a question we can really predict the answer to. Way too many variables.

Not really. We could burn the money and then default: we'd still have received $1trn worth of gadgets.

Sure, it'd be better to use the money productively, then we get two things: $1trn worth of gadgets + whatever $1trn bought in the U.S.

And, of course, one could do worse than burn $1trn. One could finance one's enemies, for example.

Not really. A default will set any economy far back.

You also risk unrests what with pensions cut and similar effects.

Look at Greece, they went through hell just not to default (again).

A large part of Greece's problem is that they're in the Eurozone and don't have any control over their monetary policy.

Greece is the only developed nation to default on an IMF bond payment and negotiated a 50 percent haircut on their bank-held debt.

They definitely defaulted.

Inflation is simply a partial default.

Yes, of course.

The U.S. does not borrow dollars from China without China having exported that many dollars' worth of trinkets to the U.S., for how else would China get those dollars to lend back to the U.S.?

Today's mercantilism is all of this form: country X maintains a long-term trade surplus with the U.S., forces its exporters to exchange their dollars for local currency, and then country X's central bank buys U.S. treasuries (i.e., lends to the U.S. government) with those dollars. Yes, those central banks could purchase other dollar-denominated assets, and if the U.S. Federal government did not engage in deficit spending then those central banks would have to buy other dollar-denominated assets -- or they would have to let exporters keep their dollars and figure out what to do with them, or perhaps trade would have to balance.

Another way to put this is that Congress' deficit spending drives the U.S. trade deficit. If the U.S. budget suddenly went into long-term surplus then the mercantilist nations would have to start buying other dollar-denominated assets, or else the trade deficit would have to swing into surplus (which would then see the U.S. become a mercantilist nation...).

So when someone says "what if China lent the U.S. $1trn and ..." what they're saying is equivalent to "what if China exported $1trn worth of trinkets to the U.S. and ...". And look! It's what actually happens. China maintains a long-term trade surplus with the U.S., so it's continually selling $$$$' worth of trinkets to the U.S. and continually lending similar amounts of $$$$ to the U.S.

Compare to "what if China lent the U.S. 10trn Renmimbi and ..." -- completely different idea, though, of course, the U.S. only borrows in dollars.

Yes, I didn't say all this earlier, but people should really know this (people really don't). EDIT: The 15 upvotes above are from people who do know these basic facts of economics.

Thank you for the explanation, though the edit detracts from an otherwise excellent post.

China could just as easily export oil to any country inn the world in exchange for us dollars. They could then buy US treasuries with those dollars. No need to conflate trade deficits with loaning money. They could also buy any number of things around the world with US dollars earned from selling us stuff. Given all that, I really think someone in This discussion is counting some dollars twice.

> They could also buy any number of things around the world with US dollars earned from selling us stuff.

Yes, I said this ("dollar-denominated assets").

> China could just as easily export oil to any country inn the world in exchange for us dollars.

Let's think this through (ignoring the fact that China is a net importer of oil, so they wouldn't export any oil). China sells stuff to Europe for dollars. Whence those dollars? Europe probably had treasuries, sold them, and paid China... except that actually they'd just transfer the treasuries -- why pay extra fees? Whence those treasuries? Well, Europe sold... stuff for dollars and so on.

(Actually, Europe borrows in euros, so euros too are a reserve currency, but let's ignore this. So it's not right for me to use Europe in the example above, but let's pretend for the argument's sake.)

Few things in economics are zero-sum games, but one thing that is a zero-sum game is international trade. If China maintains a trade surplus with the rest of the world, then the rest of the world maintains a trade deficit in the same amount. The U.S. dollar is a reserve currency because there is nothing else now to use as gold used to be used, and the rest of the world insists on maintaining a trade surplus with the U.S., which means they... have to accumulate dollars or dollar-denominated assets.

Because of this, the rest of the world can also trade with each other in treasuries, and so you're absolutely right about that. But new lending of dollars to the U.S. most likely stems from exports to the U.S. Certainly that would be true for any sufficiently large sums: the creditor could not accumulate such sums without exporting to the U.S.

So I stand by the assertion that for China to lend $1trn to the U.S. means to export a similar amount to the U.S. as well.

>> So I stand by the assertion that for China to lend $1trn to the U.S. means to export a similar amount to the U.S. as well.

OK, if I accept that then I'm left with the idea that it's a really bad policy. The stuff we bought from China has a useful lifetime (food gets eaten, products wear out), but the money we owe them does not - barring inflation of course.

The OP asked what if the US borrowed $1trn from china and spent it all on military spending. That's where the $1trn worth of "gadgets" comes from.

China exports N dollars' worth of trinkets to the U.S., then buys N dollars' worth of dollar-denominated assets, the majority of which are U.S. treasuries (so China lends them back to the U.S.).

Therefore "what if China lent the U.S. $1trn ..." is roughly equivalent to and interchangeable with "what if China sold $1trn worth of trinkets to the U.S. ..." and vice-versa.

Is the purchasing of bonds the only form in which foreign nations lend to one another?

As governments? Yes. Of course, the private sectors can and do also lend to other countries (both governments and private sectors).

All fiat currencies have significant inflation though. Few also benefit from mercantilists incessantly wanting to sell products for that currency.

Mind you, mercantilism can have significant detrimental effects on the importer -- no doubt. But it's not all roses for the mercantilist exporter either.

Really, a multi-decade trade imbalance is not a good thing for anyone, but it's not that clear who is the worst off.

Why is a multi-decade trade surplus bad? Doesn't that mean you have an extremely productive / competitive economic engine?

Is it bad because of the opportunity cost of not levering up and investing research and future productivity growth?

You are giving goods to people in exchange for IOUs, but those IOUs can't be redeemed for anything you want, by assumption

Correct.

The only way you can use those IOUs is if the roles are reversed and the U.S. starts maintaining a trade surplus with the rest of the world (and so the rest of the world a trade deficit with the U.S.).

Before the dollar became the reserve currency of the world, the world settled trade in gold. With gold as the reserve currency it was very important to not run out of gold, and this served to keep trade balanced in the long term (and probably also served to keep the lid on growth of international trade, since to buy one kind of thing you'd have to sell some other kind). Incidentally, the concept of comparative advantages is probably a lot more meaningful in the context of balanced trade...

But the dollar is the reserve currency. Which means that the world maintains a trade surplus with the U.S. Which means they export things to the U.S. in exchange for IOUs that will get them nothing much (it does help to defend their currencies during crises, but not much more).

Meanwhile, Chinese people (in China) are effectively paid less than they should be for the labor they put into manufacturing things to sell to the U.S. This is obvious in that China forces exporters to exchange their dollars for Renminbi, which means those exporters can't buy other things with those dollars than Renmimbi. Also, all those factories in China make things people want in the U.S., not things that people want in China (though maybe there's a lot of overlap).

So my take is that mercantilism hurts the mercantilist. It does also hurt the importer in different ways: by reducing employment, for example, and removing productive assets for another, and these things might hurt more when it comes time to rebalance world trade. Who knows, maybe Chinese people in China and Americans will gladly continue this state of affairs. But somehow I doubt it.

> So the only way the US comes out ahead in that situation is through playing games with inflating the currency while lying about it to recoup the costs of servicing the debt.

Or, you know, investing the funds in infrastructure and other improvements that yield more benefit than the debt service costs.

Or—though there are ethical issues with this—using some portion of the borrowed funds to subvert or other displaced the lending government and cancel the debt. [0]

There's probably other mechanisms besides these, as well.

[0] Although eventually this was reversed by an outside coalition, Iraq did the brute force version of this to Kuwait in 1990.

I mean, GDP shouldn't account for debt. GDP is a measure of how much we produce. If people within our borders spend a year building $1tn worth of tanks, then we have produced $1tn of GDP that year. In terms of measuring what we produce, it's irrelevant how much we promised to pay China in the future. (Though of course in terms of predicting our future wellbeing, our promises to China do of course matter.)

If your production was only possible with the injection of foreign funds, why should the value count towards your nation's GDP and not the lender nation?

GDP measures (traded) production. If you produce $2tn of tanks, in tanks, then by definition that production is part of your GDP. Now if China sold you $1tn in tank parts in exchange for future payments, then sure, that $1tn will be part of China's GDP.

If that trillion dollar investment earns more than the cost of interest on it, then we are better off.

You seem to equating "military spending" with "lighting a mountain of money on fire", which is intellectually dishonest. To put things into perspective, a medium-sized military base will generate roughly $5 billion in economic activity and contribute to ~50,000 full time jobs. A trillion dollars is enough to put a new city on the map.

Military spending isn't limited to tanks, it also directly contributes to scientific research, technological advancement and improvements in manufacturing techniques.

That may be true, but so does other form of spending, like funding space programs or just funding scientific research directly.

Agreed, but the OP said that giving a trillion dollars of borrowed money to the military would impoverish the nation in the long run.

My counter-argument is that that money will still find its way into places that truly drive economic, technological, and productivity growth. And if the ROI from that is greater than the cost of the debt, the nation will not be impoverished, but will be better off.

I agree that its not the most efficient means of investing in these things, but it is a way that has worked in the past.

A military base buys labor, technology, services, raw resources and produces defense/security. You're conflating what the military base spends with what it produces. (the point of the argument against GDP)

Just because I spend money on something, does not mean that I produce that thing, even if my spending increases demand for said good. That results in double counting production, which was already counted once by the seller.

Military spending also creates new technologies and improves economic productivity. Thus, it drives growth in the economy, not just through direct purchasing and salaries, but also by making traditional investments.

I'm not focusing on what is produced (in fact, I made an explicit statement to this effect), but on investments made that drive productivity growth (which is considered the most direct driver of economic growth). And if those investments made earn more than the costs of interest on the debt, then it's a net win for society.

But what if it's mostly domestic spending? The money spent for salaries flows in whatever those individuals need/desire to spend (groceries, barber shop, you name it).

The part of the trillion dollar injected in any economic activity in a closed system stays in that system.

(The part of that sum that is used to buy imports is another thing, although I guess it's far more complicated to properly account for)

Honestly, every time I think about this my mind just melts; I'll be really glad if somebody can clearly explain where is the catch.

except you can't account for debt without accounting for assets.

Japan, Greece, and Italy have the highest portion of debt to GDP (235%, 182%, 133%) except that Japan and Italy are very rich countries, Greece less so...

You can't compare Japan with Italy or Greece.

Japan issue its own currency, so it's in the same position that USA.

Italy or Greece are in the same position that California or any other state. Actually worse, because the FED work for the USA states, the Central European Bank, for the European states, not so much.

May be GDP wasn;t designed for this usecase. But since you have mentioned this I have an stupid idea, Could we theoretically measure countries like Stocks, and each countries get its Debt, Asset, Cash, Profit Loss Account as well as P/E and PEG etc.

You mean the Gross National Product(GNP)?

That's what they used in the US when I was a kid. There are some legitimate-sounding reasons to switch to GDP instead, but I think the real reason was GNP turned negative.

> There are some legitimate-sounding reasons to switch to GDP instead, but I think the real reason was GNP turned negative.

GNP never turned negative. If you mean GNP growth rate turning negative, well, if you look at real GNP and real GDP historical charts, the places where GNP growth goes negative line up pretty much with those for GDP growth, though GDP tends to have lower peak and higher trough levels.