short answer- yes.

spending is aggregate demand.

all spending supports prices to some degree.

spending for real consumption can reduce real consumption available to others.

and all in the context that exports are real costs and imports real benefits.

Yes. That makes sense.

So what happens when they do decide to spend it. Does the amount at their disposal matter then?

Say that China uses its deposits to purchase Tys’s. This converts reserves in the FRS reflecting China’s demand balance into Tsy’s. This is just the shift of one asset form into another.

When China decides to sell Tsy’s, then the transaction just moves corresponding reserves back to the commercial banks with whom China does business and this is reflected by credits to China deposit accounts. China can then do with its money what it wants. Where’s the printing and inflation? It’s a wash, other than interest accrued.

:)

lending is not reserve constrained.

leaving china’s funds in a reserve account has no effect on the real economy unless china decides to spend them, which they can always do any way, regardless of policy

Are people waiting outside a bank in a queue waiting for the Fed to increase reserves so that they can get a first come first serve treatment ?

Excuse me, but just crediting their reserve account (equivalent to printing money) would lead to an increase in the money supply and cause inflation, not to mention devalue the currency. Bottom line – Deficits do matter.

Now that the Fed is wrapping its collective brains around how to set interest rates by paying interest on excess reserves (one can only hope they sit and read Scott’s excellent paper on the topic) , would it require new legislation or does the Fed already have the power to allow Trsy to fund deficit spending by simply overdrafting its Fed account?
http://www.businessweek.com/news/2010-01-26/fed-weighs-interest-on-reserves-as-new-benchmark-rate-update1-.html

Seeing as bond sales are no longer necessary to set overnight rates, Trsy overdrafts could replace interest paid to bondholders with interest paid to the Fed–which would then forward it back to Trsy– making the worry of $300 billion this year or $700 billion in 2019 in federal debt service payments seem rather pointless.