The debt hawks are to economics as the creationists are to biology.
Despite all appearances, we own China. China has sold its soul to the U.S. By focusing on export, and accumulating dollars and T-securities, China has strengthened the dollar. Now, what can China do with its enormous cache of T-securities? If it stops “lending” to us, i.e. stops using its dollars to buy more T-securities, it simply will accumulate more dollars.
So, what else can China do with its dollars? Three bad choices: It can trade more dollars for other currencies. This would flood the market with dollars, weakening the dollar, and making export to the U.S. more difficult (while making our export easier). Or, it can increase its worldwide purchase of assets – real estate, hard and soft goods, etc. – which in addition to being politically risky, also would flood the world with dollars. Or it simply can keep more dollars in it’s checking account at the Federal Reserve Bank.
So aside from purchasing T-securities, which effectively locks up (actually destroys) dollars, China is stuck. If they wish to keep exporting to us, they are forced to keep accepting dollars, which in turn, forces them to purchase T-securities. All those pundits who worry about “What will happen if China stops lending us money?” do not understand that China cannot stop buying T-securities.
China does not lend us yuan; it cannot use yuan to buy T-securities. It lends us only dollars, the dollars we previously created. The U.S. does not need China to lend us dollars; we are a monetarily sovereign nation with the unlimited ability to create dollars. We don’t need China’s.
Previously, we discussed the China trade deficit myth, when we said:
”A trade deficit is an example of one country devoting great effort to creating scarce materials for another country in exchange for something that requires no effort by the other country. In that sense, China is our servant. They work, sweat and strain and use their valuable resources to create and ship to us the things we want, while we, hardly lifting a finger, ship dollars to them. Who has the better deal?”
“To satisfy our desires, China could ship us every yard of cloth and every ounce of steel in their country; they could burn all their coal and oil; they could employ every man, woman and child in dismal sweatshops; they could empty their nation of all physical resources, and still we would have plenty of dollars to send to them, simply by touching a computer key.”
So, we own China. By emphasizing export rather than internal money creation (aka deficit spending), China has dug a deep pit for itself. Yes, China has had strong economic growth, but at what price? It has received in return for its exports, an asset it cannot use – U.S. dollars. These dollars are unusable, not because they are worthless. On the contrary, dollars are quite valuable. The problem is that in using the dollars, China would depreciate their value, which would destroy China’s export-based economy.
Of course, China knows this. Sadly, U.S. pundits, who fret about our so-called “debt” to China, don’t understand it. And the debt-hawks, who believe exporting is more prudent than deficit spending, really don’t understand that for a monetarily sovereign nation, deficit spending is the most prudent, controllable way to grow an economy.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity
#Monetary Sovereignty - Mitchell 
Dear Rodger,
What a new brave and fresh concept! And I believe you’re right on cue. Too bad our narrow-minded politicians don’t see it that way.
With today’s global economy based entirely on the dollar, China has no choice but to keep their mass wealth of dollars at bay, i.e. in US’ Treasury. In another word, US does indeed own China.
Thanks for a very interesting article.
Tam Nguyen
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I’ve heard this argument about how China must buy more US T bills due to exchange rate. I think that exchange rates are relative and interconnected, when I change the rate between US and China, I also change it with respect to a bunch of other countries. So, if China doesn’t put the money back in the US then China’s rate would increase, making them less competitive reducing job growth, creating social unrest, and political instability for the party.
What would happen if China instead pumped the US dollars into all the countries of the world that are part of the global economy in a distributed manner that is appropriate to keeping their relative exchange rate approximately the same relative to one another. All the other countries that have more US dollars supplied will see there exchange rate relative to China increase.
Therefore, China may be able to maintain exchange rate competitive, reduce its dependance on US debt to their economy. Thus, by spreading out the US dollars among many nations, China can slowly ween itself off US debt. China has already called for diversification and moving away from using the US dollar as the standard in trade.
Holding a lot of US dollars is an instrument that may be used to manipulate exchange rates. I believe this is why you hear about China being accused of exchange rate manipulation and that its currency is undervalued.
-Non Chinese User
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Tom,
Your comments could be the basis for a book, so I hope you’ll excuse some “shorthand” here.
Exchange rate is of great importance to currency traders, and of some importance to monetarily non-sovereign nations (which must acquire money from outside their borders) and other import/exporters. It is of minimal importance to Monetarily Sovereign nations as it has a very small relationship to inflation.
Whether China owns dollars or quasi-dollars (i.e. T-securities) is just this side of meaningless. T-securities are dollars — just a less liquid form of dollars — that pay interest.
China does not depend on U.S. debt. China acquires loads of dollars by exporting to us. It can use these dollars to purchase goods or other currencies. Or it can exchange dollars for T-securities (misnamed “debt). This is not a loan; it is just an asset swap: one form of dollars for another form of dollars.
For China to “ween itself off US debt,” it would have to reduce its positive balance of trade with us. That probably will happen automatically, as the Chinese consumer acquires more of a taste for American goods and services. But I’m not sure why China would want to “ween.”
As for the US dollar being the “standard in trade,” that is meaningless. The euro is the #2 standard, and look what it has done for the PIIGS.
The whole controversy about China’s currency being overvalued is a tempest in a teapot — something old-time, gold-standard economists love to debate about, but economically not very significant.
I know that all of the above will engender a load of “Yes, buts.” As I said, whole books can (and have) been written about it. Bottom line: China and the US are Monetarily Sovereign. They have the power to do anything they wish with their money — create it, destroy it, increase its value, decrease its value, etc. That’s what “Sovereignty” means.
Rodger Malcolm Mitchell
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