While it is true that China didn’t create any dollars to purchase our debt, someone is holding the debt. And when China holds our debt, shouldn’t that limit the number of dollars in circulation, thereby increasing the value of the dollar relative to China’s currency?
This is gold standard economics that we must get beyond, and soon. It assumes a finite amount of money and an infinite amount of resources, allowing the money’s “value” to rise and fall according to its total quantity.
The current reality is that the money is infinite and resources are limited. If China accepts our dollars, which Congress can produce as a no-cost commodity, for its resources and labor comprising the goods we purchase then whatever price is agreed to is correct in macro terms. If that price is below the cost of making the goods here and presents no resource drain or pollution issues we are the winners.
The damage done by trade policy is via the unwillingness of Congress to allocate sufficient dollars to allow consumers to purchase the cheaper goods and allowing the importing businesses to collect any advantage gained from that policy entirely to the benefit of shareholders. Without a revenue restraint on spending the only restraint possible is of real resources, which the Chinese have accepted as their own limitation, not ours.
If our domestic consumers have sufficient dollars to maintain a dignified lifestyle without incurring excessive private bank debt then it makes no difference who makes the goods or where they are made. What is preventing that is a general ignorance of the macroeconomics in play and an unreasonable fear of inflation from a gold standard perspective. As long as resources are available for sale in dollars the government can afford them at any price and is the price setter. Production will always be increased to capture demand up to the maximum of potential before raising prices.
It would be different if there were some degree of difficulty involved in making any payments on the debt, but there isn’t, and no sacrifice of our own resources or labor is required to do so. Congress simply needs to create the dollars which happen automatically in the non-discretionary budget under “debt service”. The proceeds from bond sales destroyed the currency required to purchase the bonds by reducing the debt, so the only actual currency created in the transaction is the interest.
Borrowing is a misnomer when applied to Treasury debt, as the government sector can never “have” money and debt at the same time. Since every dollar created in the private sector also creates an equal debt entry as a tracking entity logic says that reducing the debt reduces the currency in the private sector. That debt entry also destroys tax collections, so if sufficient deficit spending doesn’t occur to offset the drains of trade deficits and the resulting wealth accumulation they enable then the general economy will suffer and become reliant upon excessive bank debt.
Once we are able to view money creation properly in a fiat system it becomes obvious that a “balanced budget”, the political holy grail, is actually a 100% tax rate that allows no means of storing value from commerce, satisfying the desire to save, or allow for population/economic growth. Since public money is required to “net” retire private debt, starving the economy of public money creates a time bomb of private debt that can only be defused with constant GDP growth to roll over that debt with more debt.
This, of course, crashes and burns with every downturn of the business cycle. This has historical proof in the fact that the only seven times we have come close to reducing the debt for more than a few quarters have all resulted in almost immediate recessions or depressions. A chart of sectoral balances can be found here if you doubt this. Coincidence doesn’t equal causation, but “every damn time” suggests it strongly.
