Borrow From China? Not!

Oh the horror of it all!

Standard mantra is that the US government borrows money, lots of money, from China. China forgodssake! Candidate Obama said as much in his 2008 campaign and guys like Limbaugh, Hannity, and virtually every presidential candidate, people who should know better, repeat it. Why shouldn't we believe it? The US has to get its money from somewhere besides taxes doesn't it?

We should not believe it because it just is not true - at all! The United States does not borrow money from China, or from anybody else. The United States creates new money every time it spends. A country that creates its own money has no need to borrow its own money from someone else.

So why does this myth persist you might wonder? I think it persists for two reasons.

First, most people assume the US government is just like a business or household that must live within its means or go bust. Businesses and households rely on revenues or incomes. If they spend more than they take in, they often borrow to cover the difference. The federal government, however, is far different. With its ability to issue dollars it does not rely on or even use revenue at all (although politicians wrongly call taxes "revenue"). The federal government creates money as I said. Some people call it "printing" money, although the government doesn't phyiscally print very much. Mostly it simply instructs banks, electronically or by check, to credit peoples' checking accounts. In addition to crediting peoples' checking accounts, federal spending creates  what are called bank reserves which is what private banks use to back their customers' deposits. The upshot is that there is absolutely no need for the federal government to take out bank loans, run up credit card debt, or borrow in any way.

Second is the Treasury's own misleading terminology. The Treasury sells Treasury securities in an amount roughly equal to the government's deficit spending. Why? Not to finance its spending, but simply because way back in the gold standard days Congress decreed that it must. The Treasury, for some inexplicable reason, refers to its sale of securities as "borrowing". The Treasury doesn't borrow the money spent on securities any more than a private bank borrows the money you deposit in a CD. And the Treasury does not spend the money it receives for the sale of securities. That money stays on account until time to redeem the security, at which time the Treasury just debits the purchaser's Treasury security account and instructs the purchaser's bank to credit his checking account by the same amount plus a little bit of newly created interest money. Now, here's the source of the confusion - China is one of the entities that buys Treasury securities. China has lots of dollars to invest because we buy so much stuff from China. China could stuff those dollars under its collective mattress, or it could, and does, invest them in US Treasury securities to safely park them and draw interest. That, my friends, is not lending. That is savings!

Oh, by the way, that $18 trillion federal debt? None of that debt is money borrowed from a lender or charged on a credit card. By definition, the federal "debt" is the current amount of unredeemed Treasury securities. In other words, the amount people, companies, and countries have saved through the US Treasury. The $18 trillion in debt is more accurately described as $18 trillion in private savings.

So, I rest my case. The United States does not borrow from China, or from anyone else, because it has no need to.