Deficit Owls | Dollars Do Not Leave The US Financial System @deficitowls5296 | Uploaded March 2017 | Updated October 2024, 5 hours ago.
Frank Newman, former Deputy Secretary of the US Treasury, discussing the relationship between the US national debt and China. Dollars (the ones that can be used to pay taxes or buy Treasury bonds) can only exist in the US financial system (with the small exception of paper dollar currency, but most of the dollars that exist are electronic). If a foreign entity holds US dollars, it either means that their bank has a US branch which has an account at the Federal Reserve, or their bank has a partner correspondent bank who's actually holding the dollars for them, who has an account at the US Federal Reserve. Even the dollar accounts that foreign government have all only exist at the US Federal Reserve.
The reason we "owe money to China" is because we run a trade deficit with them. We import more from them than we export to them, so they end up accumulating dollars. Those dollars appear in the Chinese government's account at the US Federal Reserve. They came from US banks' accounts at the Federal Reserve, and all they did is change ownership.
Regardless of whether the dollars (reserves) are held by banks or by China, or some other nation, they only have 2 options of what to do with them: they can either hold them as dollars, or use them to buy US Treasury bonds, part of the "national debt." (They could sell them to somebody else, but this just pushes the same choice to somebody else).
Since reserves at the Federal Reserve are exactly as safe of a financial asset as US Treasury bonds (which are also operationally equivalent to accounts at the Federal Reserve), most banks or governments holding reserves will use them to purchase Treasury bonds, so that they can earn interest. So, selling bonds is best thought of as a service that the US government provides to savers: it allows them to earn a higher interest rate on their US dollar assets, rather than letting them earn zero or near-zero by holding their dollars as dollars.
Watch the whole video here: vimeo.com/41449585
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Frank Newman, former Deputy Secretary of the US Treasury, discussing the relationship between the US national debt and China. Dollars (the ones that can be used to pay taxes or buy Treasury bonds) can only exist in the US financial system (with the small exception of paper dollar currency, but most of the dollars that exist are electronic). If a foreign entity holds US dollars, it either means that their bank has a US branch which has an account at the Federal Reserve, or their bank has a partner correspondent bank who's actually holding the dollars for them, who has an account at the US Federal Reserve. Even the dollar accounts that foreign government have all only exist at the US Federal Reserve.
The reason we "owe money to China" is because we run a trade deficit with them. We import more from them than we export to them, so they end up accumulating dollars. Those dollars appear in the Chinese government's account at the US Federal Reserve. They came from US banks' accounts at the Federal Reserve, and all they did is change ownership.
Regardless of whether the dollars (reserves) are held by banks or by China, or some other nation, they only have 2 options of what to do with them: they can either hold them as dollars, or use them to buy US Treasury bonds, part of the "national debt." (They could sell them to somebody else, but this just pushes the same choice to somebody else).
Since reserves at the Federal Reserve are exactly as safe of a financial asset as US Treasury bonds (which are also operationally equivalent to accounts at the Federal Reserve), most banks or governments holding reserves will use them to purchase Treasury bonds, so that they can earn interest. So, selling bonds is best thought of as a service that the US government provides to savers: it allows them to earn a higher interest rate on their US dollar assets, rather than letting them earn zero or near-zero by holding their dollars as dollars.
Watch the whole video here: vimeo.com/41449585
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
And follow our sister page, Modern Money Memes:
facebook.com/ModernMoneyMeme
twitter.com/ModernMoneyMeme
