US gov sells TBills, those TBills are bought by China.
The transaction you described also translates government debt into currency, which China also sits on, so it's a kind of an exchange debt.
So the US 'owes' China a gazillion dollars in services and stuff. One way or another.
One great example of inflation is the housing market. Private sector banks create money from nothing, by balance sheet expansion, every time they originate a mortgage. Because the stock of housing is less than the demand, every time the banks create more money it drives prices up. Because money in the housing market mostly stays in the housing market, that is people usually take the proceeds from a sale and put them into a new house, there isn't too much spillover to non-housing markets. The same is true for student loans.
So as you can see, two of the largest examples of inflation in the US are caused by the private sector, not Treasury spending. Please note though that the Federal Government does set banking policy as well, along with various direct and indirect guaranty programs, so in that sense ultimately they are responsible.
[1]https://en.wikipedia.org/wiki/Primary_dealer#Primary_dealers...
US dollars are a form of debt to the US economy.
So If you hold TBills/TBonds, the US government owes you money.
If you hold USD, then the US economy owes you 'stuff' that you can exchange those dollars for.
Anyone who holds TBills/TBonds is lending to the US Government.
China holds a lot of both, ergo the US is indebted to them ... essentially, the US does borrow money from China. Though the sale may not be directly to China, ultimately, that's who's sitting on those bonds/cash.
China isn't the US's lender and they do not make any loans. They can't foreclose, because no loan exists. All they can do is take their coupons or sell the security to someone else who will do the same.
China can't starve the Treasury of money because the Treasury exclusively borrows reserves from the Federal Reserve.
Also worth noting is that with the stroke of a pen Congress and the President acting in concert could restore the Treasury's power to spend money into existence directly. The US creates securities as a matter of public policy, not because it actually needs them to finance itself.
So long as enough oil is denominated in dollars to satisfy US demand for imports, it doesn't really matter what currency other countries pay. A eurodollar crunch doesn't have any appreciable effect on US domestic prices and neither will a eurodollar glut. Petrodollars are eurodollars. [1]
To cut right into the meat of the issue, US issued currency will remain valuable until economic and political collapse destroy US consumer markets and productivity. Foreign asset holders cannot cause that by refusing to show up at treasury auctions. It would take a serious civil war, a world war where the mainland USA wasn't left untouched, or a similar multi-megadeath level catastrophe. And even then it wouldn't be impossible for the US to pull through as a going concern, as it were.
[1]https://ftalphaville.ft.com/2016/01/25/2151037/petrodollars-...
"China isn't the US's lender and they do not make any loans."
Yes, China is a lender to the US, in fact the largest lender [1]. Treasures are loans/bonds. Whoever owns them is a lender to the United States. It's economically the same thing as any other nation selling bonds.
"They can't foreclose, because no loan exists. All they can do is take their coupons or sell the security to someone else who will do the same."
It's the same thing as government debt in all other nations. If you loan money to Greece, you can sell that Greek debt to someone else. The economics of government debt are the same in the US, Canada, and US even if 'how it gets sold' is different.
"China can't starve the Treasury of money "
China can 'starve' any nation to the extent they are a lender to that nation. China's demand for Treasuries makes up part of the demand curve for Treasuries, along with all the the demand. In just the same way as there is demand for Greek, UK and Canadian bonds. Or stocks. Or corn, or whatever.
If China was the only buyer of US Treasuries you can dam well be sure they can 'starve the Treasury' - because if nobody is buying Treasuries, then the government is printing money.
"Also worth noting is that with the stroke of a pen Congress and the President acting in concert could restore the Treasury's power to spend money into existence directly."
Every nation on Earth can do this. It's called 'printing money'. It's not a new idea, and it has dramatic consequences including hyperinflation.
Summary:
China is the #1 lender to the US both in Treasuries (and by holding US dollars.)
US government debt operates differently, but economically is the same thing as government debt to basically any other nation.
The US does have the advantage of 'seignorage' which is to say that because so many people need US dollars to do so many things, that there is a nice bit of 'cushion' in demand for USD, but that's only worth so much.
Otherwise it's just like anywhere else: governments loan at a certain rate, or they can tax, or they can print money and see confidence lost in their currency.
[1] https://en.wikipedia.org/wiki/National_debt_of_the_United_St...
> China can 'starve' any nation to the extent they are a lender to that nation. China's demand for Treasuries makes up part of the demand curve for Treasuries, along with all the the demand.
The Federal Reserve controls short term yields completely through its open market operations desk. It controls long term yields as well, because they are a function of expectations of short term yields. If China, or Russia, or anyone else stops buying treasuries, the Primary Dealers will pick up the slack, and they will always take that deal because no matter what the yields are they make money off it.
> If China was the only buyer of US Treasuries you can dam well be sure they can 'starve the Treasury' - because if nobody is buying Treasuries, then the government is printing money.
The Federal Reserve, not China, creates reserves every time the Treasury or a member bank asks it to, which is all the time. It's called an elastic money supply. Relatively few reserve notes are actually printed, because there isn't a lot of demand for Federal Reserve Notes compared to demand accounts.
>Every nation on Earth can do this. It's called 'printing money'. It's not a new idea, and it has dramatic consequences including hyperinflation.
Hyperinflation is a consequence of a collapse in productivity, not of money printing. Some governments turn to printing more money as their money becomes worthless, and there is a feedback loop, but that is a consequence not a cause. Hyperinflation can also occur when the money issuing sovereign effectively loses their sovereignty, fully or partially.
> China is the #1 lender to the US both in Treasuries (and by holding US dollars.)
The Federal Reserve is the USA's bank, not China. China is just another depositor at the Fed and whether they choose to store their capital account surplus with the USA in a interest free account (reserves) or an interest bearing account (treasuries) is irrelevant to the solvency of the US Treasury.
I hope this helped everyone else with an interest in understanding some of the widespread ideologically motivated ("money printing" is a shibboleth) misconceptions in this area.
I think the opposite is true, I think you're not grasping some basic economic issues and may need to re-look at the situation.
None of your responses are in fact responses to my points.
When the Federal Reserve conducts open market operations, it does create reserves out of nothing, but most Treasury securities are not bought by the Fed. The Federal Reserve can buy treasuries directly from the government via non-competitive bids, but generally buys and sells treasuries on the secondary market via primary dealers.
[1] https://www.treasurydirect.gov/indiv/products/prod_auctions_...
This is true, in the sense that the Treasury and the Fed work together extremely closely, and both are acting as or on behalf of the government. But strictly speaking, it's the Fed that conducts the auction because it is the Treasury's fiscal agent.[1][2]
The link you supplied provides useful information for a retail investor who wants to buy securities, but it's not and it isn't meant to be a description of the fine mechanics of government funding. In the event that the TT&L accounts[3] and Treasury's account at the Fed are together insufficient for Treasury's spending needs, then it creates securities and transfers them to the Fed for auction, in exchange the Fed debits Treasury's deposit account. This all follows from the statutory limitations on both entities. Treasury isn't legally permitted to carry a negative balance at the Fed, but the Fed legally can carry a negative balance on its own account. A primary benefit of and reason for this arrangement is it makes the funding predictable. Personally I find the system elegant in its (legally mandated) complexity.
Saying "the Treasury sells securities at auction" isn't really wrong, seeing as it's just a simplification that is acceptable in virtually every case with the sole exception being discussions like this one. It's a lot like saying "I sold some AAPL stock." You didn't really, your broker did. In everyday conversation there's nothing wrong with these simplifications.
[1]https://www.investopedia.com/articles/economics/08/treasury-...
[2]https://www.investopedia.com/terms/t/taaps.asp
[3]https://www.newyorkfed.org/aboutthefed/fedpoint/fed21.html