Recycled Worries: Ed Schultz v Daniel Webster
In high school, I wrote a paper on the controversy over the Second Bank of the United States, c. 1830. I was recently reminded of it listening to Ed Schultz, a leftish talk radio host. He was going on about the horrors of U.S. external debt. After listing how many billions were held by various countries, he suggested that if a few of those countries decided they didn't like our policies on global warming or foreign affairs, we would be in deep trouble. They could call in their loans, U.S. interest rates would shoot up, and the average American homeowner would suddenly find he was paying much more for his mortgage or car loan than he expected (summary by memory, details probably wrong, basic argument I believe accurate).
There are two things wrong with this argument. The first is that the U.S. government borrows on a world capital market, and capital is fungible. If South Korea gets mad at us and South Koreans insist on cashing in U.S. treasury securities as they come due, refusing to buy any more, and investing in Japan instead, that frees up capital that would otherwise have been invested by someone else in Japan—which can then be used to buy the next issue of T-Bills. If the South Koreans decide, for some odd reason, not to invest anywhere at all, that decreases the world supply of capital by a tiny fraction of the total and pushes up world interest rates, not several fold as Mr Schultz seems to imagine, but by a minuscule amount.
Much the same mistake is made by those who explain the Iraq War as an attempt by the U.S. to make sure it can get enough oil. Oil, too, is a fungible commodity with a world market. Middle Eastern countries that depend on oil revenue are unlikely to stop pumping and selling it, whoever runs them. If Iraq decides to sell to France instead of to the U.S., that frees up whatever oil France would otherwise have bought for our use.
The second mistake was pointed out, as best I recall from my high school researches, by Daniel Webster c. 1832. Then as now, there were vocal worries about foreigners owning too much of America. Webster pointed out that foreign investment meant, not that they had our stuff, but that we had their money. If push came to shove, if foreign governments tried to pressure the U.S. by threatening to withdraw their citizens' investments, we could keep it—refuse to pay back the debt. Their capital, after all, in the form of canals and the first railroads, was immovably located under our jurisidiction.