An important little primer

But more to the point, it does not matter who owns the public debt, because its repayment places absolutely no budgetary burden on anyone. It might take a minute or two out of the day of some operations person at the Fed, but that’s all. That person might bring up the spreadsheet of a Chinese bank’s savings account at the Fed (its “Treasury securities” account) and deduct a certain amount, by a keystroke, thereupon to bring up that same bank’s checking (“reserve”) account spreadsheet and add that same amount, by a second keystroke. The debt is thereby paid. Ta-da!

No one sees a tax increase. No one’s stuff is dispossessed by Chinese soldiers. No Shanghai Shylock turns up demanding pounds of American flesh. There definitely isn’t slavery. As a matter of fact, no one except people working in finance is ever aware that it is happening.

It’s intuitive but wrong to picture the public debt as private debt we’re all on the hook for. In reality, public debt isn’t really properly thought of as borrowing at all, according to Frank N. Newman, former deputy secretary of the U.S. Treasury under President Clinton. Since the U.S. doesn’t need to borrow back the dollars it originally spent into existence in order to spend them again, the purpose of issuing Treasuries is really just for “providing an opportunity for investors to move funds from risky banks to safe and liquid treasuries,” he writes. Investors aren’t doing the U.S. a favor by buying treasury securities; the U.S. is doing investors a favor by selling them. Otherwise, without the option “to place their funds in the safest most liquid form of instrument there is for U.S. dollars,” would-be bondholders “are stuck keeping some of their funds in banks, with bank risk.”

The reason China owns all those safe securities is that because the U.S. purchases all those Chinese-made commodities for U.S. dollars. China converts the dollars into the dollars’ interest-bearing siblings, bonds, and park them at the Fed until they mature – that is, when the spreadsheet switcheroo ceremoniously retires the debt. At this point, China usually just rolls over the debt by purchasing new securities. This keeps Chinese currency weak against the dollar, so China can have the U.S.’s export market – this is the “currency manipulation” you’ve heard self-righteous pontification about.

What does the U.S. get out of this arrangement? IPhones for which it exchanges digital entries in a spreadsheet at the Fed. What does China get? An extremely productive economy, for one thing.