–Warren Mosler interview: What if China stops buying U.S. debt?

The debt hawks are to economics as the creationists are to biology.

Warren Mosler is that rare individual who is both a successful businessman and an economist. He now is running for the Senate from Connecticut.

Warren has the ability to explain abstruse economic subjects in simple, illuminating ways. Here’s one excerpt from a recent interview. You can read the entire interview at Interview.

(Background: The Chinese buy U.S. T-securities by transferring U.S. dollars (not yuan) from their checking account at the Federal Reserve Bank to China’s T-security account, also at the Federal Reserve Bank. Later, when the Chinese redeem those T-securities, the money is transferred back to China’s checking account at the Fed. During the entire purchase and redemption process, the dollars never leave the Fed.)

Interviewer: “Money the Chinese earn by sending merchandise to the United States are credits in the U.S., and these credit units are nonredeemable, so Chinese owners can do nothing with these things unless they use them to buy American products, and if they do, those units become profits for American firms.

But there is also another possibility, which sometimes raises concerns in the larger public, and this is what happens if China should choose to get rid of these dollars by selling the U.S. securities they own.

While the amount of dollars owned by foreigners doesn’t change, the price of the dollar would in fact decline. If China sells off American debt, dollar depreciation may be substantial.”

Mosler: “Operationally, it’s not a problem because if they bought euros from the Deutsche Bank, we would move their dollars from their account at the Fed to the Deutsche Bank account at the Fed.

The problem might be that the value of the dollar would go down. Well, one thing you’ve got to take note of is that the U.S. administration is trying to get China to revaluate currency upward, and this is no different from selling off dollars, right?

So, what you are talking about (selling off dollars) is something the U.S. is trying to force to happen, would you agree with that?”

Interviewer: “Yes.”

Mosler: “Okay, so we’re saying that we’re trying to force this disastrous scenario—that we must avoid at all costs—to happen.

This is a very confused policy. What would actually happen if China were to sell off dollars? Well, first of all, the real wealth of the U.S. would not change: the real wealth of any country is everything you can produce domestically at full employment plus whatever the rest of the world sends you minus what you have to send them, which we call real terms of trade.

This is something that used to be important in economics and has really gone by the wayside.

“And the other thing is what happens to distribution. While it doesn’t directly impact the wealth of the U.S., the falling dollar affects distribution within U.S., distribution between those who profit from exports and those who benefit from imports.

And that can only be adjusted with domestic policy. So, number one, we are trying to make this thing happen that we are afraid of, and number two, if it does happen, it is a demand-distribution problem, and there are domestic policies to just make sure this happens the way we want it to be.”

So there you have it. All the hand wringing about what happens if China were to stop buying T-bills and instead buy some other country’s money is just a bunch of blah, blah, blah.

The relative value of U.S. dollars, compared with other money, would go down, which is exactly what the Federal government has been trying to effect — foolishly, I might add.

When China or any nation buys T-securities (aka “lends us money”), they must use dollars, and the dollars never leave the Fed.

Even if China were to buy another nation’s debt, using dollars it has earned from exports, the dollars still never would leave the Fed.

Think closely about this process and you will see why federal “borrowing” is a meaningless exercise.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity


5 thoughts on “–Warren Mosler interview: What if China stops buying U.S. debt?

  1. Mosler doesn’t do a great job here when he talks of distribution. It’s too bad he didn’t put this in terms that the average person can understand. When he speaks of those who profit from exports, he means business owners. When he speaks of those who profit from imports, he means consumers.

    What is incredibly sad is that we are currently wasting a fantastic opportunity to spend our human capital on things like education, rebuilding infrastructure, arts, culture, etc., since we are benefiting from the import of cheap consumer goods. If the dollar falls, we’ll have to make more of that stuff ourselves, which means not as much human capital to put towards the things that truly make us human.


  2. Andrew,

    The differences between business and consumers is not quite that clear cut. Exports benefit businesses, which hire and pay employees, who are consumers. So exports benefit both businesses and consumers.

    Imports benefit businesses by providing lower prices and/or better products, which benefit consumers. Thus, imports and exports benefit businesses and consumers to pretty much the same degree.

    What is even sadder than the incredibly sad example you gave is that we have unlimited dollars and, for all practical purposes, unlimited human capital (what’s unemployment these days?), and are wasting the opportunity to use them both.

    You can thank the debt hawks for that.

    Rodger Malcolm Mitchell


  3. I know I was being simplistic, but it’s that or blah, blah, blah…

    We have unlimited dollars, but if we want to buy things (oil) from others who don’t have the right to issue dollars, they have to find our dollars valuable, for whatever reason.

    Given the current perception of the value money and resources, issuing an excessive amount of dollars could prove problematic, but of course, we’re a long way from there if we are to believe the markets.


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