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China Doesn’t “Own” The USA

Here’s some excellent propaganda from a group that clearly has no idea how the monetary system in the United States works.  This provocative commercial depicts a classroom in the year 2030.  The professor is describing how great empires fail.  He claims that the USA spent and taxed its way out of a great recession and that now the Chinese (in the year 2030) “own” the USA.  That’s scary stuff.

There’s just one problem. When we trade with China they send us real goods and services. In return, they get fancy looking pieces of paper with old dead white men on them.  Because they have no use for this paper, they open what is the equivalent of a savings account with the US government (by buying U.S. Treasuries).

China obtains US government bonds by virtue of running a trade surplus with the USA. The size of their US debt holdings is not a choice to “fund” the USA, but rather to do trade with the USA. They could easily choose to hold fewer US government bonds, but that would also involve selling fewer goods to the USA. That won’t happen. So, by definition, they obtain US dollars via trade and invest them in bonds.

When someone says that China “owns” the USA because they own a lot of US Treasury bonds they are essentially confusing the causation here.  China doesn’t own a lot of US bonds because the USA relies on them as a funding source.  China owns a lot of US bonds because THEY choose to sell a lot of goods and services to the USA which makes them an importer of US dollars and they willingly choose to reallocate those dollars to US bonds.   If they stopped buying our bonds the US government wouldn’t suddenly be “out of money” and demand for US bonds wouldn’t suddenly evaporate.  Because the causation is so often misunderstood this myth has been perpetuated for years on end.

Update – It should be further emphasized that China owns roughly $1.5 trillion in US government bonds as of 2015.   The US government has assets currently valued at well over $150 trillion with federal government liabilities of $18 trillion.  If we include federal lands and other assets the asset side of the balance sheet is well over $200 trillion.  This means the US government has a substantial positive net worth.  But more importantly, the US government’s liabilities to China equate to roughly 1% of its entire assets ($1.5T on $150T).  So, it is a wild exaggeration to state that China “owns” the USA.

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