What if China dumps its U.S. Treasuries?

BACKGROUND

The number erroneously referred to as Federal “debt” is the total of outstanding Treasuries. When you buy a Treasury (T-bill, T-bond, T-note), you add to the so-called “debt.”

I say “so-called” because Treasuries are not debts of the United States, nor are they debts of taxpayers.

Treasuries are deposits into Treasury Security accounts.

They resemble bank safe deposit boxes in that the depositor, not the bank or U.S. government, owns the deposits, and the bank never touches them.

Similarly, the federal government neither uses nor even touches the dollars that are in Treasury accounts.

The federal government does not use tax dollars to pay off a T-bill, T-note, or T-bond. The dollars do not help fund federal spending. Nor are they owed by future taxpayers.

Upon maturity, the federal government returns the dollars in a T-account as though these dollars were in a safe-deposit box.

Thus the so-called federal “debt” cannot be too high, nor can it be “unsuitable” (another favorite word of debt worriers) any more than a safe deposit box’s contents can be too high or unsustainable.

The federal government pays its bills out of the General Fund, similar to a checking account, and by law, this fund cannot be negative.

As a bookkeeping device, the federal government sells enough T-securities to offset whatever would be a negative General Fund total.

This accounting trick has no practical significance because the Federal Reserve, now Monetarily Sovereign, has the unlimited ability to increase the dollar balance in the General Fund.

Quote from former Fed Chairman Ben Bernanke when he was on 60 Minutes:
Scott Pelley: Is that tax money that the Fed is spending?
Ben Bernanke: It’s not tax money… We simply use the computer to mark up the size of the account.

Statement from the St. Louis Fed:
“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”

Treasury securities are not a form of borrowing; they are not owed by the government or taxpayers and do not help the government pay its bills. So what is their purpose:

1. They provide the world with a safe, convenient, interest-paying place to store unused dollars. This helps stabilize the value of the dollar.
2. Because the Fed arbitrarily determines the interest at which deposits will accumulate funds, these accounts help the Fed control overall interest rates.

Among those who don’t understand Treasuries (T-bills, T-bonds, T-notes), a persistent refrain is, “What if China dumps or stops buying Treasuries?” What would the federal government do?

That is like asking a bank, what if your big, safe-deposit-box customer started taking money out of his box? The answers are:

1. Nothing, or
2. If the government needed to add dollars to the total “debt,” the Monetarily Sovereign Federal Reserve would buy T-securities — as many as it wished, whenever it wanted.

Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”

The U.S. is not unique in its unlimited ability to create dollars. The European Union has the unlimited ability to create euros:

Press Conference: Mario Draghi, President of the ECB
Question: I am wondering: can the ECB ever run out of money?
Mario Draghi: Technically, no. We cannot run out of money.

All of the above brings us to these excerpts from an article that appeared online:

Memo to China: You Look Silly When You Threaten to Dump Treasuries, 

Americans often quote the saying of President Theodore Roosevelt, “Speak softly but carry a big stick.” In other words, it is important to make only realistic threats. 

(In that vein), threatening to dump US Treasuries is silly.

China is the second-largest foreign holder of US treasuries, only after Japan. China’s holdings of US treasury securities dropped to $980.8 billion in May, falling below $1 trillion for the first time in 12 years, according to data released by the US Department of the Treasury.

The further deterioration of China-US relations will likely have a direct impact on China’s risk appetite for holding US treasuries, and reducing holding of US treasuries could become a precautionary option.

This was the only large scale ultimatum the Global Times story presented and it’s bizarre to see that one mentioned. China and Japan have both been reducing their holdings of US Treasuries in recent years, with no adverse impact to the US government funding or the dollar.

Recent US Treasury reports show China’s holdings at $981 billion, down from a peak of $1,316 in November 2013. That current $981 billion represents only 3.2% of total US government debt.

….the real reason China cannot sell off its holdings of U.S. government bonds is because Chinese purchases were not made to accommodate U.S. needs.

Rather, China made these purchases to accommodate a domestic demand deficiency in China: Chinese capital exports are simply the flip side of the country’s current account surplus, and without the former, they could not hold down the currency enough to permit the latter.

To see why any Chinese threat to retaliate against U.S. trade intervention would actually undermine China’s own position in the trade negotiations, consider all the ways in which Beijing can reduce its purchases of U.S. government bonds…

China can buy other U.S. assets, other developed-country assets, other developing-country assets, or domestic assets. No other option is possible.

The first two ways would change nothing for either China or the United States. The second two ways would change nothing for China but would cause the U.S. trade deficit to decline, either in ways that would reduce U.S. unemployment or in ways that would reduce U.S. debt.

Finally, the fifth way would also cause the U.S. trade deficit to decline in ways that would likely either reduce U.S. unemployment or reduce U.S. debt; but this would come at the expense of causing the Chinese trade surplus to decline in ways that would either increase Chinese unemployment or increase Chinese debt.

By purchasing fewer U.S. government bonds, in other words, Beijing would leave the United States either unchanged or better off, while doing so would also leave China either unchanged or worse off.

China remains an export-depended economy (even though it is currently trying to shift its economic model).

Therefore, it needs to run a current account (or trade) surplus. If it does not, China will face either

more unemployment, for reduced exports mean that the Chinese exporters are forced to lay off workers,

or more debt, as Beijing will encourage large fiscal transfers to the households (social security, unemployment benefits, food stamps, etc.) or the creation of new businesses to mitigate the consequences of unemployment.

All this requires more money and, consequently, more debt.

This is why China purchases US Treasuries: to run trade surpluses and avoid higher debt/unemployment — not, as many think, to “help” American consumers so that they can purchase more Chinese imports.

China might make geopolitical waves by buying Japanese government debt. The yen is trading at very low levels and the Japanese central bank has had to buy over half the debt outstanding.

This is one of the steps the Federal Reserve could take and often has taken. The Japanese Central Bank is Monetarily Sovereign like the Fed and the EU.

Even if China wanted to buy Japanese debt to support Japan (as in make a point about the US failure to do much about its long-standing post financial crisis distress), it’s not clear the market is liquid enough for China to procure all that much. 

In other words, this idea of punishing the US by dumping Treasuries may be appealing to a domestic audience, which has long been unhappy about the magnitude of China’s dollar foreign exchange reserves.

But no one knowledgeable in the US will lose sleep over it.

SUMMARY

The so-called federal “debt” is not a debt. lt is the total of deposits into Treasury Security accounts, which are similar to bank safe-deposit boxes. 

Neither the federal government nor future taxpayers owe the “debt.” To pay it off, which is done daily, the Treasury simply returns the contents of these accounts to the account owners.

These accounts serve two purposes: To provide a safe, interest-paying repository for unused dollars (which stabilizes the dollar) and to help the Fed control interest rates.

Thus, there is no danger inherent in a “too-large debt.” Even if China stopped buying T-securities, the U.S. government and U.S. taxpayers would be just fine.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

1. Monetary Sovereignty describes money creation and destruction.
2. Gap Psychology describes the common desire to distance oneself from those “below” in any socioeconomic ranking and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:

1. Eliminate FICA
2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
3. Social Security for all
4. Free education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction, annually. 
8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY