Paying off China for Dummies


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So how do we pay off those Treasury securities held by China?

Treasury securities are held in accounts at the US Federal Reserve.

Let’s assume $1 billion of Treasury securities held by China comes due tomorrow.

Here’s what would happen tomorrow:

  1. The US Federal Reserve would lower the amount of Treasury securities still held by China by $1 billion.
  2. The US Federal Reserve would increase the number of dollars in China’s bank account at the US Federal Reserve by $1 billion plus interest.

The US Federal Reserve keeps the books and increases and decreases these balances just by changing the numbers on its books.

That’s how it is and has always been.

Paying off the Federal debt is nothing more than debiting a securities account and crediting a member bank account at the Fed.


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11 Responses to Paying off China for Dummies

  1. manny valesco says:

    “Leader in democracy and freedom”

    Begotka, cspan just aired some China economic policy hearings, Stephen Roach was there, and you could see that he sees everything through his myopic finance viewpoint and doesn’t seem to connect with the common man on the ground. One of the other panelists tried to emphasize northern china is running out of water, putting up a dirty coal plant every week, there is going to be HUGE social implications, and the pollution and civil rights injustices are going to rip the nation apart, stephen roach didn’t like that I think. You quote the bible, a world made up of greedy self serving monkeys won’t go far into the future if you ask me, that invisible hand has run amuk and instead of pushing those ideas onto our kids to buy and party til you puke, perhaps a little more of that bible sense should have been spread about treating each other with decency.

    #3 – what if they take the money and buy russian hackers to just STEAL US information and research assets, or go buy bill and hillary clinton and other government agents to do thier dirty work for them? How does eminent domain work if china man owns the US government politicians? Huh?

    Reply

  2. Dave says:

    Warren, thanks for your reply, which is both logical and indisputably correct, but it misses the point I was driving at.

    That point is sensed more accurately by Jim Baird.

    Here is a very simplified and schematic version of what has been going on: relatively free Americans have been buying quality goods from the relatively unfree Chinese, who’ve been worked very hard by their decidedly illiberal government, in exchange for US dollars (symbols of value). Eventually, the Chinese will realize they want real goods in return for their symbols of value. What happens if they use those dollars to purchase the kinds of real assets I mentioned in my first post? What is the outcome when a decidedly unfree (post-communist? fascist?) regime or its agents purchase strategically important US real assets (from real estate to factories to ports)? As hinted by the Dubai Ports World episode, if that began happening on a large scale, the US might pass laws to prevent such real property acquisition. Perhaps we might offer the Chinese export goods, then, on which to spend their dollars, such as musical compositions or poetry, at ridiculously high prices? What would the Chinese reaction be? This, I think, is what so many are really worried about: that the Chinese will come with armies and navies to get real value for all of the real goods they’ve sold us.

    Forgive me if this train of thought takes us too far afield of your original topic.

    Reply

    WARREN MOSLER Reply:

    should they decide to spend their dollars, which historically has pretty much never been done by any nation, they have to buy from willing sellers at prices the seller wishes to sell at.

    they are also subject to all kinds of legal restrictions, including national security related restrictions.

    also, inflation is relatively common, as are wars over the fact that one’s holdings of currency have lost value to higher prices.

    If china wants to attack I suspect it will be for other reasons, and if they have a military advantage they will be able to demand real payments from us whether or not they even hold any of our currency. So I don’t see the threat of war looming if we somehow allow inflation to exceed China’s demands for currency stability.

    Reply

  3. Vipul says:

    Dave,

    And if you ever wanted the property back, well that’s why we have eminent domain.

    Reply

  4. Jim Baird says:

    Dave,

    Chinese buying of assets in the U.S. would simply give them (if they run them well) an opportunity to earn more dollars. If they run them better than thier previous American owners, they make us (USians) better off. These dollar balances only reduce our wealth if they are used in exchange for goods that are then shipped back to China (i.e. exports, which is what most people worried about China wnat to happen anyway) But there are limits to this – all of the things in your list are things that cannot be shipped back…

    Reply

  5. warren mosler says:

    the funds are transfered from china’s account to another’s account at the fed.

    all purchases contribute to the determination of market prices

    Reply

  6. Dave says:

    When China takes that $1 billion plus interest from its bank account at the US Federal Reserve and uses it to buy US real estate, US factories, shares in US corporations, US port operations, US research labs, US mining facilities, US hospitals, US amusement parks, etc. and does this day after day, week after week, month after month, what happens then?

    Reply

  7. Dave Begotka says:

    I mentioned this before here, devaluing of our currency was going to tic off China, and it was said “It’s their problem”. Now I do not think China is the model country either, however I was always led to believe that the US is a “Leader in democracy and freedom”. This does not set a good example, now if you believe that we have a democracy does that mean American’s are all a bunch of? Well you see it and I don’t even want to go any further, I think WE all need to “Honor they neighbor” more. Isn’t that in some book?

    When the poison shows up in the food, paint and other products we get from them how can we complain?

    http://www.youtube.com/watch?v=EMljWDEWABM

    Glen Beck on the devaluing thing “FUNNY?”

    Reply

  8. Teresa says:

    Warren, I started reading the ‘series for dummmies’ and I was thinking that if I understood that, any journalist in the National Press Club should.I have to think how to nicely channel there your proposals through the NPC blog.Also, have you ever done personally some presentation at the NPC in Washington,DC- at a luncheon or dinner at the Club? They are intensely advertised to all the members(that is to all the press in the U.S. and in the world) through the NPC website.

    Reply

    warren mosler Reply:

    SOUNDS LIKE A GOOD IDEA!

    Reply

    Teresa Reply:

    OK! So let us get to it.

    Reply

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