interesting story on USA debt from the washington post

updated 7:09 p.m. ET April 6, 2008

John W. Schoen
Senior Producer
As millions of Americans figure out how they’re going to spend their tax rebate checks, some readers are wondering: Just where is this money coming from? Is it true we’re borrowing it from China?

I‘ve been told that the special rebate the IRS is sending out this year is funded by borrowed money, money that has been borrowed from two or three countries, including China. Do you know where this money is being obtained?
— Kay R. Concordia, Kan.

-------------------------------------------------------------------

These days, digital money flows around the world with the speed of electrons. Or at least it’s supposed to; lately, the credit crunch has slowed things down a little.

But tracing the flow of individual dollars gets complicated pretty fast. Nowhere is that more true than the money that flows into and out of the nearly $3 trillion U.S. budget. So while it’s possible that one of the dollars in your rebate check came from China, the rebate isn’t being paid directly from loans from foreign countries. Here’s where it came from:

The money spent by the federal government comes from two main sources: revenues (mainly taxes) and borrowing (mostly Treasury debt sold to the public.) The folks down at the Treasury are in charge of figuring out how much Congress and the White House overspend, and every three months they auction off enough in notes and bonds — essentially IOUs — to make up the difference. Billions of dollars worth of this paper is sold to the highest bidder.

Anyone can bid: you, me or the Chinese government. Lately, Beijing has been a big buyer of our debt paper — largely because China has lots of extra dollars we sent over there to buy cheap goods. Those dollars have to get recycled and, like most other investors, foreign governments like U.S. Treasury debt because it’s a safe pace to stash dollars. (If we borrow too much, and the dollar gets too weak, that could change.)

Japan is still the biggest foreign holder of U.S. Treasury debt ($587 billion as of January, 2008 ). China ($492 billion) comes in second, but is rapidly moving into first place: something like $90 billion of U.S. Treasury debt was sold to China in just the past 12 months. Other big holders include the U.K. ($160 billion), Brazil ($141.7 billion), and two categories the Treasury lists simply as “oil exporters” ($141 billion) and “Caribbean banking centers” ($108 billion). The list includes 22 other countries that are holding $10 billion or more.

Since Congress and the White House didn’t raise any new taxes to pay for the roughly $150 billion being spent on tax rebates and other “economic stimulus,” the government has to borrow that money; some of it likely came from China. But tax revenues and proceeds from borrowing all go into the same federal spending pot, so it’s tough to unscramble the egg. Your rebate may have been funded by Treasury debt sold to China, or someone else — or from someone else’s tax payments.

If the dollars in your tax rebate did come from China, give them a big “Welcome home!” when you get your check. They could have originally come from your wallet and traveled, after a stop in the cash register of your local Wal-Mart, all the way to China and back.

Unfortunately, we now owe interest on those dollars until the U.S. government pays back the money the Chinese government has lent us.