I enjoy a good laugh, and the New York Times provided one a few days ago in the article titled "China Tells U.S. It Must ‘Cure Its Addiction to Debt’" at this link.
Here's an excerpt:
“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.
What's so funny about that is the irony: For many years, China has been selling their goods and services into our market in order to obtain US dollars; they want our dollars, we want their goods and services at bargain prices. Why do they want U.S. dollars? So they can give them back to us in return for U.S. Treasury securities. We get the dollars back, they get Treasury securities. What do we use the dollars for? Among other things, we use them to buy spy satellites and other national security assets to keep better tabs on ... China.
Here's the (ironic) sequence of events in the cycle:
1. China decides that exporting to the USA is how they want to keep many of their workers employed;
2. China's workers make things, then China sells them to us to obtain our dollars;
3. We get the goods and services, China gets non-interest-bearing U.S. dollars that sit in their checking account at the U.S. Federal Reserve;
4. China pays those dollars back to the USA, in return for interest-bearing U.S. Treasury securities that sit in their savings account at the U.S. Federal Reserve;
5. The U.S. Treasury uses a portion of those returned dollars to buy spy satellites, Aegis cruisers, and other national security assets to help us keep tabs on China.
Bottom line: China gets the U.S. Treasury securities they want as a reward for their nineteenth-century mercantilist economic policies, and the USA gets beefed-up capabilities in intelligence-gathering and other military assets, financed at rock-bottom interest rates. Everyone is happy.
How will we ever "pay China back"?
That question is irrelevant. The real question is, Why does China keep refusing to let us "pay them back" no matter how hard we try? Whether or not we "pay China back" is completely under China's control; they can choose to get "paid back" every time any one of their T-securities matures -- but instead of keeping the dollars we try to pay them back with, they choose to exchange those dollars for new T-bonds, T-bills, and T-notes.
The answer is obvious. China doesn't want their U.S. dollars back; they'd rather have U.S. Treasury securities, and it's their choice. Why should they want non-interest bearing dollars instead of interest-bearing T-notes?
As long as China chooses to have an economy based on exports, the US market will be their biggest opportunity for selling their stuff -- and the U.S. dollar will be currency they'll receive for the stuff they sell us. What they buy with those dollars is their choice, and their track record is telling us they prefer to save those dollars by investing in U.S. Treasury securities. If China, all of a sudden, has some kind of problem with U.S. Treasury securities -- why don't they just sit on all those non-interest-bearing U.S. dollars we keep trying to give them?
Doesn't make much sense, does it? Unless, of course, it's simply nationalistic political bluster designed to impress Chinese workers who make things for us instead of for themselves.
This topic is perennial. See my previous article from two years ago, Poker with China.