The ad starts with a Chinese Expo, a fully modern Chinese society of the future (where all the Chinese are rich) and ends with the speaker stating that the Chinese “owned most of their debt” and the catch phrase “so now they work for us”.
A catchy ad, no doubt. But completely misleading.
First, China does not own most of the U.S. debt, in fact the vast majority of debt is held by the American public (rather its banks). Second, even if China DID own a majority of our debt, wouldn’t they be the one’s with the problem? Third, is it really wise to hold out a communist nation who manipulates their currency and is literally building ghost towns to maintain growth the paragon of virtue the U.S. should strive for? I think not.
But the biggest myth propagated by this ad is that we actually owe anything to the Chinese or that we are beholden to them at all, we are not. When the Chinese send us their goods (exports) we send them our cash (Dollars), the Chinese use these dollars to buy U.S. goods (imports, but not many of them), Oil and other commodities. The remainder of the dollars sit earning no interest. Think of these dollars like your own dollars sitting in a checking account. When you have excess money in your checking account you move it to a savings account, which earns interest. The process of moving money from your checking to your savings is similar to that of the Chinese moving their dollars into Treasury Bills, Bonds and Notes. They are moving from a non-interest dollar account to an interest earning dollar account (Treasuries). Both are U.S. Debt obligations, but only one pays interest. We could pay off all the Chinese debt by a simple accounting move, transferring the Chinese “Savings Account/Treasuries” to the Chinese “Checking Account/Dollars”. The Chinese DO NOT FUND our deficits.
The United States is a sovereign monopoly issuer of its own non-convertible currency and all of our obligations are denominated in our own currency (this is a very different situation than the Weimar Republic of Germany).
What I am not saying is that there is not government waste, there is, a ton of it. I am all for eliminating government waste – however the scare tactics and outright lies add nothing to the debate. This lies do harm as the populous is led to believe something that isn’t true.
Let’s get rid of government waste, and do it honestly.
For a complete understanding of our monetary system I suggest The Pragmatic Capitalist blog.
Scott Dauenhauer, CFP, MSFP, AIF