the same people who promoted public policies that expand the federal budget deficit in the hopes of “starving the beast” — the welfare state, still had to sell that debt to someone. China was only too happy to oblige, and now here we are, with China sitting on a pile of our debt to keep our dollar strong. But according to Trump, “China is the Enemy”.
China didn’t “create” any dollars to purchase that debt. It got excess reserves because we bought a lot of their stuff, especially in the dot.com bubble largely fueled by the lie that the world would end in 2000 if everyone didn’t upgrade their computer network. Dollars never leave the US banking system so it wasn’t possible for China to take its gains home to fund anything. It has to use those reserves to purchase goods from others who trade in dollars, using our Fed as a no-cost exchange bank.
Treasury debt, in spite of all the knee jerk reaction to the word debt, is not a funding mechanism for Congress to spend. It is simply a way we maximized the gold reserve when we did that nonsense, enabling Congress to anticipate revenue and make any deficit non-convertible to gold until a later date when taxes were collected or economic gains from the spending increased revenue. Sans a gold reserve to defend, Treasury bonds serve little purpose, as the excess reserves required to purchase them must already exist and can only exist if Congress spends in deficit. Bonds are simply an asset swap, giving up liquidity for a small return.
President Bill Clinton was able to turn a large federal budget deficit into a surplus. And during that time, we had social security (we still do), Medicare (we still have that, too) and numerous other popular social welfare programs that are a target for the “starve the beast” crowd. It is entirely possible that if we had continued the economic trajectory that Clinton had started, we might well have paid off a good chunk of the debt that China now owns. If there is no debt to buy, China has much less leverage on the exchange rate between its currency and ours.
Clinton leveraged private bank debt to dangerous levels to accomplish those surpluses. Some economists believe that the housing bubble started during the period when there were no Treasury bonds generated by federal deficit spending and a currency-starved economy had to use their assets as ATM cards to maintain their living standards.
This worked well for cash flooded investors from around the world without the usual safe haven for excess reserves in Treasury debt. The US housing/real estate market has always been the go-to safe investment back up to Treasury until Wall St decided to run with scissors and over-leverage that market with derivatives. Those derivatives shifted market demand away from houses and into the loans for those houses, bundling mortgages and removing risk from originators of the loans to feed that demand. What could go wrong, right?
The budget deficit requires the United States to sell the bonds that the Chinese buy from us, the same bonds that the Chinese use to “manipulate” their currency for a trade surplus that grows the Chinese economy.
A considerable amount of Chinese productivity ends up as US dollar reserves. Those reserves can then be used to purchase resources and commodities from other nations, or set aside in Treasury bonds. The only alternatives to purchasing bonds are to leave the reserves in their Fed account or purchase other investments within the US. Do we really want them manipulating our real estate and commodities markets?
A healthy consumer-based economy in the US is the best thing for China, not some nefarious conspiracy to destroy its best market. Sadly, it is the conservative’s perpetual war on labor that is fueling much of Trump’s rhetoric, not macroeconomics that makes any sense. China is now outsourcing much of its own production and implementing AI/robotics at a fast clip. The robots can make stuff anywhere for the same cost, so the production jobs will likely come back to the US very soon, but the only gain we will see is lower transportation costs and a few tech jobs in robotics.
Once production leaves a country it is a fool’s errand to try bringing it back. The price increases would tank the economy, even if the pain was eased into with tariffs. If Trump thinks he can manage to gain support for more aggressive action against China in a vain attempt to bring back jobs he is likely to spell the end of American economic leadership. The only reason I can imagine for such foolishness would be that he believes the same lies about our monetary system that you do.
Only now have the deficit hawks come to their senses to say that they want to balance trade. Well, they say that they want China to play fair. Whether they are sincere in their efforts is still a matter of controversy.
Trade is a currency drain, but we gain real goods made with real labor and we pull the currency out of our backsides at will. The only surprise in this is that China agrees to it at all. We only have to increase spending to replace the currency lost to cheaper goods to put our economy on track. We could do that with a job guarantee and pay people to do whatever benefits their communities, creating a realistic bottom for wages and benefits as well as supplying an injection of money that is countercyclical to the business cycle.
With a sovereign fiat currency and debt only denominated in that currency, America can never involuntarily fail to pay any obligation also denominated in that currency and can “afford” to purchase any resources and labor priced in that currency as well. It never needs to “find” money to spend where sufficient resources and labor are available to accomplish the goal the spending is deployed to accomplish. It never needs its own currency back from the private sector, taxed or borrowed, (although it often needs us to have less of it as inflation control only) as it must first create the currency before either is possible, and its past spending has no bearing on any future spending.
Please note that the currency drain/sequestration of wealth accumulation is never mentioned as a threat to our economy, in spite of the fact that it represents the exact same effect as do trade deficits. The fear of deficits and the debt (only an accurate record of currency in the private sector not yet used to pay a federal tax obligation) is the result of corrupt politicians who know the truth but are afraid to go against the tide of general ignorance that they pander for to remain in office.
