China weighs slowing or halting purchases of U.S. Treasuries

The headline read “China weighs slowing or halting purchases of U.S. Treasuries”.

Some perspective.

• The US imports (buys) more things from China than China imports (buys) from the US, a trade deficit for the US.

• The US sends more dollars to China to pay for its imports from China than China sends to the US to pay for its imports from the US.

• China uses the excess dollars to buy US Treasuries (pieces of paper) (to keep it simple, I am ignoring China’s purchases of US things that do not get sent to China, e.g., real estate).

• The US Treasury spends the excess dollars on things that are consumed in the US, e.g., pays government bureaucrats and others who buy consumer goods.

• The US gets the benefit of the excess dollars in the form of worthwhile products and services (except, to some extent, Government “products and services”). China gets pieces of paper.

Suppose the trade deficit continues as before and that China stops buying US Treasuries. What happens to the excess dollars? Here are some possibilities.

China keeps them in a vault.

This is the best of all possible worlds. The US gets useful stuff and the Chinese get pieces of paper. Too bad China wouldn’t do this for long.

The excess dollars are worthless to China. The US Treasury does not get them, hence cannot spend them. The US loses the (questionable) benefit of the excess dollars spent by Government but avoids deficit spending. If the US could be sure that China would never cash in the excess dollars, the US Government could simply print new dollars in the amount of the excess dollars and continue to spend as before.

China buys other US debt, e.g., Corporate bonds.

Corporations probably would use the money in a way that benefits US citizens more than what Government spending would – this is good.

The US Government may be forced to reduce spending to avoid inflation – this is good.

The US Government could issue the same amount of debt as it would have to China, but sell it to others – this could lead to the same undesired outcomes the US faces now, e.g., Government wasteful spending and growing Government debt and inflation.

Most likely, the US would be better off because the US Government might be forced to control spending.

China buys other countries’ debt.

This reduces the problem to what the other countries’ do with the excess dollars, which is the same problem as what China would do with them.

China buys US products, including those exported to China and others that are not, e.g. real estate.

The US is worse off than before. China gets worthwhile goods and services and the US get pieces of paper.