Shell Games and Open Secrets

zOMG CHINA DUMPING US TREASURIES Oh Noes!!!1!

So went the hysteria in certain circles. Then some cooler heads followed a bouncing ball and recently figured out that China never stopped buying US treasuries, they just stopped buying them from us.

That the USA runs a trade deficit with China means China will buy something from us with our dollars. The money runs in a great big circle across the Pacific Ocean, because they don't put it all into capital investments in China. If we run a trade deficit, they will buy our dollars, or someone else will, and pass the value of them on to China some way. That you didn't understand this paragraph means you were cheated of an education, but trust me: trade deficits mean we sell them bonds when we buy their plastic crap toys.

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NP asked me about this today and I gave him an explanation somewhat as follows. He was uncomfortable at the idea of the Chinese buying our debt, and wondered what would happen if they stopped . . . what would we do if nobody financed our deficit spending anymore? The answer is we would cut spending to the point that we would not spend more than we took (at gunpoint) from taxpayers. What then happens to the national debt? It continues to go away.

Yes, continues. What we have right now is a credit card with a $14.2T limit and a $14T balance. What the big spenders in Congress would like to do is increase our line of credit to $15T or $16T and keep right on spending money we don't have. This, by the way, will be what happens (and then some) if Obamacare is not repealed. What the right-thinking small-government types would like to have happen is that we NOT increase our maximum credit limit anymore.

If you have a credit card with a $14,000 limit and a $14,000 balance, and they won't increase the limit for you, what do you do? You stop charging it up, is what. You stop going out to restaurants and movies on the credit card. I imagine we would start shedding Federal agencies left and right, if we stopped running trillion-dollar annual deficits. This would lead to massive unemployment for government workers, but everyone else would have an effective pay rise, long-term.

But what about the debt? Aren't we in big trouble there?

Not yet, not really. If you can make the $340 minimum monthly payment on your credit card, you can "afford" to have the $14,000 balance carry over month-to-month. If you can ONLY afford the $340 minimum payment, and you charge up more debt, and then you COULDN'T afford the $400 minimum payment on a $16,000 balance, you would be in trouble. But we can afford it still. Every year, we sell more bonds to finance the operation of our national government. Every year, we have to pay a little more on the minimum payment, to satisfy the bond holders.

Eventually, we could charge up so much debt on our T-Bill credit card that we would be unable to make the minimum payments. At THAT point, we would be 100% screwed, and would have to default and cut back on our spending. If we were to cut back so much that we ran a balanced budget starting today, nothing bad would happen with the national debt.

If you continue to make the minimum payments on your credit card, in 30 years it will be paid off. If we continue to make minimum payments on the bonds we issue, the bond holders will be made whole as their bonds mature. In 30 years we will be 100% debt-free as a nation.

Whether this is a Good Thing is a separate argument.