Dave took issue with how dismissive I was per the size the US national debt, and the amount of danger that said debt puts us in. Here's his comment in full:
I disagree with you on the National Debt.
The debt that is owed to other countries could really hurt us in the long run. If China really wanted to screw us, all they have to do is sell off the dollar and convert it into other currency. That would trash the value of the dollar and led to unprecedented inflation.
Also, the idea that we can just "not pay back" the debt would be met with international opposition on a massive economic scale. This could lead to heavy tariffs and barriers being put up against the US and destroy free trade. This would led to staggering inflation, good shortages, and a vast economic decline.
At a minimum, China's dictatorship could act unilaterally by blocking all trade. This would led to a huge trade problem with the US. Though China might be hurt worse, they have the political will to take the heat. The American people would not accept the heat...we're pansies. Just look at the Iraq war and why we're "losing."
His position is a common one, and I think is probably the position held by most Republicans, including (I think) all the current Republican presidential candidates.
But it's a topic where my inner-free-trade-libertarian rules the day for me by way of economic philosophy.
I don't worry about damage foreign nations could do to by virtue of their owning some chunk of our national debt because in order for a foreign nation to execute that damage against us, they would need to do a comparable amount of damage to themselves.
Suppose I own 20% of some major public company's stock. I can (temporarily) hurt that company by doing a massive sudden sell off of my stock, but it's going to screw me over too.
Similarly, if China suddenly sells off the dollar-denominated assets they hold (in an effort to decrease the value of the dollar, to harm us), they are going to lose a lot of wealth because, by definition, they'll be selling those dollars off for low values.
Furthermore, as I understand it, China only holds about 4-5% of our debt [1]. That could cause noticeable harm, but would hardly be catastrophic.
Moving to the possibility of China cutting off all trade, trade with China makes up about 13% [2] of our trade, and 11% [3] of their trade. That's more significant than 4%, but I think 13% is recoverable, and as much as it would hurt us to have 13% of our trade blocked off, I can not see a scenario where China would be willing to inflict that harm to us at the cost of 11% of it's own trade.
To quote the Wikipedia article on the (military) theory of mutual assured destruction, "the payoff of this doctrine is expected to be a tense but stable peace".
Finally, on the notion that our refusal to pay back huge chunks of the debt we owe China would result in world wide outrage. I grant this is true, but my counter is that to the extent this is true, I assert that there would be an equal amount of international opposition/outrage if China tried to destroy the dollar or the US economy.
For some more thoughts in a similar vein to mine, but probably better thought out and written, I'll refer (yet again) to a Cafe Hayek blog post by Don Boudreaux: "Should Americans Worry About Foreign-Government Holdings of Dollar-Denominated Assets?".
Boudreaux and I both agree that question is best answered with "probably not."
