How does the global economic boom of other countries effect the U.S.’ debt?

BY Paul Solman  June 5, 2008 at 6:03 PM EDT

Question/Comment: Recently you stated that the global economic boom (China’s especially) allowed the U.S. to go on a debt bender, which allowed us to grow faster than we really could. Would you please explain how this process works?

Paul Solman: Sure. Say you borrow from a bank to buy your house. The bank pools your mortgage – your home loan — with lots of others. It then sells loans backed by those mortgages and thus called mortgage-backed obligations (MBOs).

Lots of those MBOs, it seems, were sold to foreign investors, among them Chinese. So our economy was growing faster than it otherwise would have, in that houses sold faster than ever for higher and higher amounts, which were in turn spent on more and more goods and services, leading to greater growth. Also, more people became real estate brokers. Also, new real estate was being built, creating more construction jobs.

And the same thing happened at the government level. The government has been spending more than it taxes, thus goosing the economy. (You see why, right? It puts more money in peoples’ pockets for them to spend.)

But spending more than it takes in means the government is running a deficit. It has to borrow the difference. It borrows by issuing Treasury bills — short-term loans — and Treasury bonds — longer-term loans. It sells those loans to, among others, foreign governments, including the Chinese. In short, by lending us money in these ways and others, the Chinese have been fueling U.S. growth. But as with all growth fueled by borrowing, the end usually comes. And now it has — for the time being at least.