I keep hearing people erroneously claim that China is funding US deficit spending. It seems that every eejit with a fundamental misunderstanding of mathematics (and access to Xtranormal‘s animated talking bears) has been pushing this concept.

It turns out to be only partially true — and by partially, I mean 7.5% true. But that means the statement is 92.5% false.

The biggest holders of US debt are American individuals, institutions, and Social Security. We own more than 2 out of every 3 dollars of US debt — about over 67%. Hence, we depend far less on the kindness of strangers than you might imagine if your listen to the intertubes.

Those viral animated bears may be clever, but they sure suck at math.

Total United States’ public debt was ~$13.562 trillion at the end of the fiscal year (30 September 2010). As of last week, January 4, 2011, the United States’ total public debt outstanding has surpassed 14 trillion dollars.

Political Calculations has whipped up a chart showing exactly who is holding US debt, and funding our deficit:


click for bigger graphic


U.S. Treasury Department:
Monthly Statement of the Public Debt of the United States (September 30, 2010)
Major Foreign Holders of Treasury Securities. (At end of September 2010)

Category: Credit, Mathematics, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

73 Responses to “Is China Really Funding the US Debt?”

  1. machinehead says:

    To me, funding is a flow concept. The question is not where cumulative Treasury holdings are distributed, but rather who took down the debt sold in the past year. I suspect China loomed larger than 7.5% in that figure.

  2. if I understand this Scene, correctly..

    the PROC, either, continues to buy U$D-denominated ‘Assets’ to help maintain their Yuan-peg, or, they’re faced with, even, more Inflation at Home..

    that’s the way this works, right?

    and, if that is ‘Correct’, than, “Who has Whom, over a Barrel?”

    http://www.thefreedictionary.com/barrel #s 1, & 3, yes?
    or, is it CRB http://quotes.ino.com/chart/?s=NYBOT_CR ?

  3. obsvr-1 says:

    China is not funding the deficit, in fact none of the UST Bonds fund anything. The USTs that China owns was/is purchased with USDs already in the system. The bonds that are purchased mop up liquidity pumped into the system.

    When the gov’t wants to spend money they do not have, they create it, and if there are no open market buyers then the FED buys the bonds. In other words, if China did not buy another UST Bond it would not stop the USG from spending into deficit.

    This is all FED propaganda and a thorough misunderstanding by the politicos and MSM in regards to the debt based fiat monetary system.

  4. curbyourrisk says:

    Of that 42.2% owned by Individuals and Institutions….HOW MUCH OF THAT IS HELD BY THE FEDERAL RESERVE??????

    Please do answer, as I tried to find the statistic myself and was not able.

  5. this: “…The biggest holder of US debt is American individuals, institutions, and Social Security…”

    is a hideous Fraud..on the SocSec end of it, at the minimum..

    Cash was poured into SocSec and exchanged for non-Marketable ‘Securities’ (then Spent)..

    the only way those ‘Securities’, that were already Paid for, come back to Life, is to generate the Tax Revenues–Again..

    and, on the other hand, we have http://www.aim.org/media-monitor/government-accounting-scandals/



    to begin with..

  6. “…When the gov’t wants to spend money they do not have, they create it, and if there are no open market buyers then the FED buys the bonds. In other words, if China did not buy another UST Bond it would not stop the USG from spending into deficit.

    This is all FED propaganda and a thorough misunderstanding by the politicos and MSM in regards to the debt based fiat monetary system…”


    shhh, you’ll scare the Horses/wake the Children..

  7. machinehead says:

    Oh jeez, the MMT loonies have shown up. Free money for all — and ponies for the kids!

  8. bobthehorse says:

    Maybe Al Gore can do ‘Another Inconvenient Truth’?

  9. dougc says:

    This years deficit is about 1 trillion, the total federal debt is about 14 trillion. They should not be confused, the Chinese may only hold 7.5 % of the total us gov debt but they are financing about 20 to 30 % of this years deb offeringst.

  10. machinehead says:

    According to the Treasury, China’s holdings of Treasury debt barely rose in 2010 (through October), but the UK bought a quarter trillion worth of them.


    A surge that large is, by definition, ‘hot money.’ Someone ought to be paying more attention to this.

  11. ivar kreuger says:

    Hot money indeed. High time to read up on the currency wars of the 1920s and 30s.

    I am curious as to why Mr. Ritholtz views the fact that America owes itself 40% of its unrepayablely large debt as a “bullish indicator.” I tend to view this fact as a clear-cut long term bearish indicator and point of future economic pain. As anyone who has read financial history knows, sovereign defaults are common occurrences. So I can only assume that at some point America will default on her unrepayablely (Micheal Hudson’s word, not mine) large debt. I would much rather the US default on phony paper promises to China than SS payments to struggling seniors. Hopefully you could clarify this point Mr Ritholtz and it goes without saying, you have one hell of a blog here.


    BR: WTF are you talking about? Who said this was bullish indicator?

  12. Low Budget Dave says:

    China owns 7..% of the total, but nearly 50% of the amount issued in the last three years. If you subtract out Social Security and other imaginary investors, the total jumps up to about 80%. This is pretty much the exact opposite of the conclusion that you reached.

  13. If you subtract my strikeouts and pop ups in high school, I was an .800 hitter

  14. Thor says:

    They also have very little choice from what I understand. We give them dollars for all the crap we buy and they need to keep their currency pegged at a low rate so they have little choice but to buy that debt, and not many options when it comes to getting rid of it.

    Low Budget – Pull up a couple of graphs that show both China’s purchasing of our debt vs our trade deficit with them.

  15. jjay says:

    I am not certain about this.
    But, if you take all the Federal government annual revenues, excluding SS.
    Subtract all the interest currently being paid annuallly on the national debt.
    What is left is the amount the Federal government has to fund everything else in the budget with.
    As the national debt continues to soar.
    And average interest rates begin to rise.
    The twain shall meet!
    A simultaneous equation of sorts.

  16. Marcus says:

    So I have to assume that all the Fed’s QE2 purchases fall under the “US Individuals and Institutions” category. With Social Security, that means we owe ourselves pretty much 60% of all our debt. The way we forgive our own debt is to basically forgive ourselves all of our SS benefits and US investments so the way out of this is to eat a huge loss OR sell those US assets ASAP so that someone else can get stuck eating that loss either directly (by the gov’t not paying in full) or indirectly (by the gov’t printing money to pay in full, but with each dollar having reduced purchasing power). I’m not expecting anything from SS but I have to pay into it by law. Apart from that, I’m placing my bets with countries that actually save and produce enough to pay their bills.

    Also QE2 effectively has the Fed purchasing ALL of our issuance through June 2011. (Which has me thinking that either China will not maintain it’s peg or the Fed will not exhaust it’s purchases… unless one or the other starts buying existing Treasuries rather than new issuance. Maybe I’m missing something here.) But I think the argument is that if China stops buying our treasuries, interest rates will rise and our debt ridden nation will be screwed. That’s only HALF the argument since it assumes the Fed won’t do exactly what it IS doing by buying ALL of our issuance. If China stops funding us (ie-maintaining their peg) and the Fed continues buying all of our issuance then the yuan will rise and the dollar will fall. China will then be able to buy all the stuff we use for cheaper and for us it will be increasingly expensive. You may get every dollar you are owed, but you’ll need every one of them (and a few more) to buy the same stuff you use now.

    Lastly, the fact that we hold so much of our own debt is MORE distressing than China holding it because it lessens their incentive to keep funding us. Much of our debt inevitably ends up ultimately spent on cheap consumer goods produced in China. That means we’re going in hock and giving them our money now, while it’s worth something. If they’re not buying our treasuries (and instead are investing in gold, commodities, oil reserves, etc.) then they are stealing our buying power and locking it into increasingly scarce reserves. Over time the value of those reserves will increase, making China even wealthier and our continuous dollar printing will make the value of our reserves decrease, making the US even poorer. Look out 3rd world country status, here we come! :-)

  17. inessence says:

    You will not default on yourself…bond transactions do not”mop up liquidity.”

  18. Thor says:

    Lastly, the fact that we hold so much of our own debt is MORE distressing than China holding it because it lessens their incentive to keep funding us.

    China doesn’t fund anything – they’re simply exchanging their goods for dollar denominated assets. They have very little choice in the matter. We’re certainly not going to start paying for all of their cheap crap in Euros. They want their trade surplus to be in the safest form of dollar assets they can use and right now that happens to be US Debt. As long as China runs a huge trade deficit with us, as well as keeps up with their dollar peg, they have very little choice.

  19. curbyourrisk says:

    I still believe that the US government…at some time in the future will default. They will selectively default so as not to hurt anyone. I believe that they will selectively default on the debt held by the Federal Reserve. Not the debt held by individuals, nor the debt hdl by banks or corporations and ESPECIALLY NOT the debt held by China or the other countries dumb enough to buy it.

    Listen…in the long run…I dare anyone to show me a nation….HISTORICALLY…that fully re-paid thier debts!!!!!!

    No one actually pays it…they just keep funding themselves over and over again.

  20. Thor says:

    Curb – There are a number of European countries who paid their WWII debts in full. Our WWII debts have been fully paid off at this point as well.

  21. tradeking13 says:

    This would all be very scary stuff if our currency actually was convertible into something like gold, but that window closed in 1971.

  22. As of Oct. 2010, China is estimated by the US Treasury to have roughly 900 billion in holdings–the most of any creditor, but only barely ahead of Japan’s holdings, which are at 877 billion. Find it here:


    It’s not in a flashy pie chart on their website, just a list of creditors.

    As some have pointed out, it is utter nonsense for anyone to claim that China (or any other foreign entity) funds our fiscal deficits. It is closer to true to say that China funds some of the trade deficits, just as Japan, et al, do. But trade deficits matter a great deal more than most pundits would claim. Our trade deficits (which always must be balanced by a financial instrument surplus, i.e., if we import more gadgets, we must necessarily export more paper promises) with China and others during the nineties and aughts were one of the reasons for the sequential bubble-blowing–stocks and then houses–from which we suffered. Trade deficits loom heavily over housing even now. We might not be able to fund them if we simply allowed, e.g., Fannie and Freddie, to disappear.

  23. jaymaster says:

    Whether you’re an MMTer or not, it is just a fact that the US government can’t run out of money or default (unless by deliberate, political choice).

    They can print or move decimal points around at will, with the only real cost being devaluation/inflation. But this is NOT true for US states or Euro members.

    All US debts and entitlements can always be paid. The only question is what those dollars will be worth in purchasing real goods and services.

  24. roger erickson says:

    Oh my gosh, I’d have thought that someone as experienced as BR would know more about actual monetary operations. Just go over to the FED Monetary Affairs office someday and ask them.

    Thank god for obsvr-1. (And no, no theory involved, only existing accounting operations.)

    It’s true. We’re no longer on a gold-std, our currency is sovereign, non-convertible, our Fx floats, and we have no debt denominated in any other currency. China receives $US for the real goods they send here & keeps those $US in an account at the FED. For whatever reason, we let people holding large amounts of $US in FED “checking” accounts transfer them to FED “savings” accounts where they earn nominal interest in more fiat currency.

    Why do we do this? Just habits left over from gold-std days, where we could only create as much currency as some gold-hoarding plutocrats allowed (in order to manipulate the $ supply), and as an arbitrary reference for other interest rates, which the FED could simply mandate instead. We tried getting around gold limitations by changing the “fractional” reserve requirements, but when that became too much of a drag on policy flexibility, we just ditched the concept of fractional reserve lending all together and went to currency creation limited only by public initiative [and public intelligence :) ].

    Very roughly, this is how it works:
    Congress decides how much to spend.
    The FED creates a credit in the Treasury account at the FED.
    [Then the Treasury sells T-bonds equal to what the Treasury expects to spend. (Why? Just a habit.)]
    Then various gov agencies contract the work & write the checks. (which put currency into private hands)
    The NY FED tallies up all the actual gov checks coming due (~every 2 weeks?).
    The FED then debits the Treasury acct at the FED, by whatever amount has actually been spent.

    At end of year, the Treasury collects some circulating cash back from private hands (via some political rules :) ), and either debits everyones accounts, or actually shreds any paper currency collected [it's "fiat", after all].

    Too much currency left in private hands … more private initiative, we “may” have some inflation [never occurs in reality, absent a currency peg or foreign-denominated debt].

    Too little currency left in private hands … we have a recession, and we may have some deflation.
    (Recessions happen way more often than inflation, so fiscal is most often underspending – basically meaning that collective public gov is sitting on their ass instead of showing any public initiative or public purpose.)

    What would happen if China & everyone else didn’t buy T-bonds?
    Same as would happen if the FED decided to stop SELLING T-bonds. Exactly nothing. Buyers would all have to look for equally safe, but hopefully better investment options.

    The main purpose of fiat currency is to efficiently denominate any & all transactions that occur in a modern economy. Despite what Aristotle said 2K years ago, modern currency has little or no utility for storing value – which most people, including all exporters, haven’t caught on to. What fool would try to save fiat?

    The object of currency supply is to keep it within tolerance limits around that amount needed for a growing population and increasingly complex economy (executing more real transactions per minute). HOW to keep currency supply within tolerance limits is the main mechanism for minimizing our output gap.

    Simple accounting operations indicate that the FED only manages the price of moving $ around, via interest rates.

    By present rules, it’s nearly entirely up to fiscal policy to manage fluctuations in actual currency supply, and thereby manage our real output gap.

    Try this: JJ Lando of Goldman Sachs, on Quantitative Easing

    For more accurate descriptions of Reserve Bank Accounting, google Stephanie Kelton or Mathew Forstater

    ps: some useful history on $US currency here (by a group that otherwise doesn’t understand modern money)
    Public initiative and the beginning of US currency: A confused electorate can end up pretending to borrow it’s own currency, instead of creating it? http://www.monetary.org/briefusmonetaryhistory.htm

    or try these:

    Sen. Logan, 1939; quoting Abe Lincoln; http://www.uhuh.com/unreal/lincoln.htm

    ECCLES: We [the Federal Reserve] created it.
    PATMAN: Out of what? 
    ECCLES: Out of the right to issue credit money. 
    PATMAN: And there is nothing behind it, is there, except our government’s credit? 
    ECCLES: That is what our money system is.” 
      - Federal Reserve Board Governor Marriner Eccles in testimony before the House Committee on Banking and Currency in 1941, during questioning by Congressman Wright Patman about how the Fed got the money to purchase two billion dollars worth of government bonds in 1933. 


    BR: I’ve met Warren Mosler, we’ve sat and had coffee — he is a very interesting guy, but his math never added up for me . . .

  25. roger erickson says:

    Forgot to add that a circulating supply of fiat currency is NOT a “debt” in any real sense of the term, it’s only called debt because of unfortunate, historical semantics.

    It’s proper term is net “private savings” in currency, to the penny.

    Can we always make as much of our own currency as our population needs? Sure, regardless of any conceivable context. It’s not called fiat for nothing.

    Call it “transaction numerals” if it helps you keep things in perspective. Then remember to save in real assets, not transaction numerals.

  26. TPC says:

    It’s not that us MMTers are “loonies”. It’s simply that we understand reserve accounting. We are not working under the false premise that we live in a gold standard based monetary system. Much of neoclassical economics is based on a monetary system in which the USA does not exist. Just look at the breakdown of the money multiplier in recent years. It’s all nonsense, but we are force fed this stuff by old men with bow ties on who were taught the same lessons by the men with bow ties on before them. Unfortunately, these men were educated in a world that is now largely defunct.

    The simple fact is that China funds not one penny of the US deficit. They receive pieces of paper with old dead white men on them and they wisely moves those dollars from a checking account into a savings account. The US govt accounts for this as “debt”, but it is not debt in the traditional sense. In fact, by identity, this “debt” is private sector wealth. The US govt is never revenue constrained. The US govt does not even need to sell bonds to spend. It’s a simple reserve drain that helps the Fed hit its overnight rate.

    The simple fact that China funds nothing can be seen by studying bond auction data. Reserve forecasters at the Fed ensure that the Primary Dealers can always make a market in govt bonds. That is part of the agreement in becoming a PD after all. If you actually take the time to study the bond data you’ll notice that the PD’s can ALWAYS take down the entire auction. But we allow foreign bidders and whatnot. I guess it’s our way of being “fair”. But the truth is, if China and Japan and everyone stopped showing up at auctions the bonds would still get sold. The PD’s would buy them, execute the drain and we’d all go on telling ourselves that we can afford to spend more money. It’s really just a political charade that comforts the lawyers in Congress into thinking that the US govt is “funded” and that they can go along their merry way spending money on whatever it is they dream up.

    An alchemist is never revenue constrained. And yes, the US govt is no different than an alchemist. When we spend money we tell men and women to walk into a room and change numbers in an account. It’s that simple. A bond market is only necessary for revenue constrained entities (states, corps, EMU nations, etc). We could end the bond market over the course of several years if we had leaders that understood the system in which we reside. Instead, we all go around telling ourselves that the USA is revenue constrained, there are constraints on the lawyers in DC and the Fed controls the entire operation. It’s all a destructive myth that generally serves to feed political rhetoric and nothing more.

  27. VennData says:

    More fallacies:

    1) US Companies make lots overseas.

    ” Oft quoted is that half of S&P 500 companies’ revenues are from beyond America’s shores. But a closer look at the government’s national and international accounts tells a less heartening story in aggregate. For a start, the proportion of after-tax profits earned by US companies abroad has been falling since the end of 2008. Today, it makes up less than a tenth of total profits.”


    2) If you tell China to lift their currency they won’t

    People’s Bank of China allowed the currency’s daily trading reference point to strengthen through the Rmb6.6 per dollar level for the first time on Thursday, a day after Tim Geithner, US Treasury secretary, reiterated concerns about China’s currency policy….”


    30 Perma-bear, media-prof. Rogoff who’s been wrong every step of the way thinks that if countries cut expenditures from overspending levels, they will continue to shrink GDP, but once the drop happens, GDP can grow just as easily with less government.


    GOPstrologist Darryl Issa not only thinks he can short sell – predict which firms will go under- yet,

    … how did he do predicting the last crisis?


  28. jaymaster says:


    I as pretty much in agreement with up to your very last sentence:

    “It’s all a destructive myth that generally serves to feed political rhetoric and nothing more.”

    Treasuries also feed quite a few financial firms who sell and trade them. :)

  29. curbyourrisk says:

    We paid them off by issuing MORE debt…..That is paying peter by borrowing from PAUL. I call BS on your answer. Has anyone answered my original question????

    Out of the 42.2% of Treasury debt held by individuals and INSTITUTIONS…how much of that is owned by the FEDERAL RESERVE????

    By the way Crumudgeon….THE US FED holds more Treasuries than China does.

    And if you though UK was hot money…you should see how much buying the FED is doing…..NOW THAT MONEY MUST BE VOLCANIC!!!!

  30. constantnormal says:

    It seems that Uncle Sam has a lotta creditors. Will they all be treated equally? (prolly not). If not, who gets stiffed first? (assuming that anyone actually gets stiffed)

    Looking over the list of presented candidates, my attention settles on the US Civil Service Retirement Fund — assuming that does not include elected officials.

    After that, it’s prolly Brazil. I mean, it’s not as if they have never defaulted on us, right? That would open the door to a host of other smaller nations … but but but whaddya mean, they all hold the same debt instruments, that I cannot selectively default on the holders, it has to be by specific debt instruments?

    OK, we can start by the same time-honored tradition of under-funding pension plans, then, after the red ink gets sufficiently high, spin them off into “defined contribution” pensions instead of “defined benefit” pensions, or better still, switch them over to 403-B/401-K plans and dump the mess into the retirees’ laps.

    I’m guessing that somewhere within the Treachery Dept, someone is working on a breakdown by T-bond as to exactly who holds that issue. Then we could pick and choose which bond issues to default on, and manage to selectively hit specific lenders. Social Security seems promising, as they have a very large proportion of special IOUs issued only to them. And we have the potential to tax interest paid to domestic lenders at a higher rate, and thus take a lot of the sting out of paying interest.

    From Uncle Sam’s perspective, there’s a lot that one can do with a situation like this.

  31. machinehead says:

    Congress decides how much to spend.
    The FED creates a credit in the Treasury account at the FED.

    Utter nonsense. The Treasury account at the Fed is funded by tax revenues and borrowing.

    There is no procedure by which the Federal Reserve simply ‘creates a credit in the Treasury account.’

    It doesn’t exist.

    Chartalism [a/k/a MMT] is one of the more bizarre economic fallacies. Don’t drink the ‘unlimited credit’ Kool-Aid!

  32. TPC says:


    Where do the dollars come from that “fund” the deficit? Where do the tax dollars come from that “fund” spending. They are, by definition, spent into existence before they are ever used to buy bonds aor pay taxes. The dollars provided, which we transact with, are issued so that we can pay taxes with them. It can be no other way. People like you would be happy if the govt ran perpetual surpluses and essentially drained the private sector of its wealth. You’re a good American so go give the US govt 100% of your assets so you can help us all “fix” this great “debt” problem. Oh wait, you probably don’t want to do that do you? It’s no coincidence that the Clinton surplus (which drained the pvt sector of its wealth) preceded this great economic malaise. An understanding of the sectoral balances approach makes this crystal clear.

    Nothing in MMT says there is an unlimited amount of money that can be spent. It is in fact, just the opposite. There are very real constraints that exist and a govt that spends well in excess of its productive capacity will collapse.

    But unlike the neoclassical economists that you clearly want us all to believe we “loonies” live in our monetary reality. Not some mythical textbook world.

  33. sherman says:

    Hey! A word to all the dummies who like to throw out that Social Security has spent all the money in the trust. Alright… this is true. But I would like to introduce a concept to you. You’ve seemingly never heard of it. Ready for it? Ready? OK… it’s called a “bond”. Its a special magical thing you create when you want to spend money that you don’t have. This may sound crazy… but lots of companies issue them. Guess what? So does Uncle Sam!!! This is what sits in the trust. New debt will be issued when it comes time to cover the bonds in the trust. This is a concept you might want to sit down for. It’s called “debt rollover”. In fact, it’s done every day at companies across the nation! WOW! But where will I get the new money? Well, as long as you have something called “interest coverage”, you get to borrow more money, and the US can cover its interest expenses by dozens fold. Even Japan, with a much larger debt covers its interest… easily.

    Stop making the social security trust sound sinister. It’s not. The idiot Matt Bai of the NYT did a scare story on this vein a ways back. People who really and truly understand economics know that were it not for our horrible horrible healthcare system, we would be projecting budget surpluses. Stop lumping Social Security with Medicare. Social Security is perfectly solvent. Medicare is an abortion. The only reason people bag on Social Security is that it’s not (yet) a cash cow for corporations the way medicare is. Medicare is the biggest fraud in our nation… and I can’t believe Obama just made it bigger.

  34. Thor says:

    Machinehead – care to tell us WHY it’s utter nonsense? I’m sure I’m not the only one here who’d like to see you lay out a case other than “utter nonsense”

  35. obsvr-1 says:


    Curb – There are a number of European countries who paid their WWII debts in full. Our WWII debts have been fully paid off at this point as well.

    – Reply

    I guess you can say that there have been enough taxes collect to pay for the WWII debts, but the reality is that they have not been paid, they have been rolled over into the $14T and increasing Nat Debt

  36. blueveiner says:

    I, along with Ivan, interpreted this quote “Those viral animated bears may be clever, but they sure suck at math.” to mean that looking at the chart and coming to a negative conclusion regarding the outlook for US Treasuries was something that only an idiot would do. I probably would have chosen a different line if the goal was to highlight that Treasury ownership is a shit-show in the making.

    All those dumb pension funds holding what PIMCO has been dumping recently, even as Mo El-E talks up a slow recovery. I love to talk up my book, while hitting the bid….


    BR: I was referring to the Xtranormal animations about the Fed, gold, etc. They are witty, wildly misinformed arguments. (I’ll add above)

    One fund manager told me they are a coping mechanism, primarily passed along by people who missed a generational rally in equities

  37. kenny powers says:

    say what?


    the Fed recently overtook the Chinese as number 1. Fantastic.

  38. One day Barry will understand Monetary Sovereignty, and when he does, he will realize that China funds 0% of U.S. debt. The U.S. as a Monetarily Sovereign nation (since 1971), does not need to borrow money it previously created out of thin air, nor does it use the money it from the sale of T-securities, nor does it even receive that money.

    The federal government has the unlimited ability to create dollars out of thin air. It also has the unlimited ability to create T-securities out of thin air. The sale of T-securities is a relic of the gold standard days and is totally unnecessary.

    Why do we do it? Because the law says the federal government is required to sell T-securities in an amount equal to the difference between taxes and spending. It is a law, not a financial requirement.

    Once Barry understands Monetary Sovereignty, he will realize his entire post is meaningless.

    Rodger Malcolm Mitchell

  39. Andy T says:

    This doesn’t make me feel any better–actually worse.

    I’d rather we had more foreigners owning our debt.

    It would make a general default WAAAAY easier…..

  40. bman says:

    First off I want the social security portion payed back now. The deciders and decisions made, that resulted in social security funding 18 percent of the national debt should be hauled back from whatever pastures they may be residing in and called in to account for the result.
    That fact should be prominent in any discussion about the solvency of the social security system. I’ve found it is always conveniently swept under the rug when the issue comes up and people are asked to change their expectations of their future social security income…

    I suspect the other math here, the political climate this last year has involved a lot of foreign bashing..
    I suspect the motives of the speaker, especially with the above mentioned glossover on social security…
    That agenda can be plainly seen, what remains hidden?
    Who is Political Calculations? Makes me want to form my own think tank..
    Barry, What say ye?

  41. algernon says:

    Low Budget Dave nails your mistake, BR. You should be man enough to answer better than irrelevant ridicule.

    The hulking portion bought by the PBoC in the last 4 years would be magnified by a # of factors. The 24% owned by SS & the 2 gov’t retirement units SHOULD be subtracted! That held by the FED or the banks getting money from the FED for 0% is also pretty questionable.

    Furthermore, China is a metaphor for all the Asian central banks & the Petro-state central banks. The essence of what you ridicule is true. BR, you are really smart, but some times you are so cocksure, you are just a smart alec.

  42. Big Money Trader says:

    Lots of monetary wing nuts coming out of the woodwork on this one BR (MMT my ass)

    The math is simple, and you touched upon one of their sacred slices of nonsense — that we are s0 indebted to China, that we cannot operate without them, and shifting to a gold based currency situation is our only hope

    Keep the pressure on the wingnuts, its the only way to show people how silly they are.

  43. oldbluejeans says:

    To quote Will Ferrell in his portrayal of G W Bush on SNL: “This all makes my head hurt”. As a neophyte here, I’d like to ask the following:
    One – Does the $13.6T include SS and Medicare debt?
    Two – Is debt from Fannie and Freddie off-balance sheet and thus not a consideration? These are after all no longer implicit guarantees.
    Three – who owns US state/municipal debt?
    Four – does it really matter whether the debt is domestic or foreign? The idea that the US can squash domestic entitlement programs and tell citizens to “suck it up, no SSI for you because we don’t have it” seems pretty far fetched.

  44. Greg0658 says:

    RM – I may be just under the average J6P line in IQ, especially on this financial manipulations stuff .. but I am sure that cash is an exchange token for LABOR effort & raw MATERIALs adding in the BLEND of those 2 into a HIGHER THINGY (a widget in school) .. that TOKEN CAN’T be taken lightly .. especially if you don’t own the world .. please – deficits don’t matter :-( only if your the banker collecting interest off of the LABOR forces

  45. Barry, and virtually everyone commenting on this post, seems to make the same mistake. They believe federal financing is similar to personal financing. When you and I (and the states, counties, cities and businesses) have a debt, we must find some source of money to pay that debt. Finding that source of money can be difficult, and is a burden on us.

    The federal government is different. When it has a debt it merely creates the dollars to pay that debt. It creates the dollars out of thin air, backed only by full faith and credit.

    The U.S. easily could pay off its entire debt tomorrow, simply by creating $13 trillion (or $8 trillion, depending on how you’re counting) out of thin air, and exchanging these dollars for the T-securities it also created out of thin air.

    In 1971, the U.S. became Monetarily Sovereign. This means it has the unique and unlimited ability to create dollars. China too, is Monetarily Sovereign. It has the unlimited ability to create yuan. That’s how this poor country managed to pump so much money into its economy to recover quickly from the world-wide recession.

    Italy, Spain, Ireland and the other euro countries are not Monetarily Sovereign. They do not have the unlimited ability to create euros, and thus can be driven into bankruptcy.

    Because the U.S. is Monetarily Sovereign, it cannot be forced into bankruptcy. And because the U.S. cannot be forced into bankruptcy, no agency of the U.S. can be forced into bankruptcy. This means Congress, the White House, the Supreme Court, Social Security, Medicare and the other 1,000 federal agencies cannot be forced into bankruptcy. (All the hand wringing about “when Social Security will run out of money” is misguided. The federal government could support all SS benefits at the press of a computer button).

    Understanding Monetary Sovereignty is fundamental to understanding economics. Without that understanding, all comments are gibberish.

    Rodger Malcolm Mitchell

  46. mad97123 says:

    We are often told that China would never use their ‘nuclear’ option of selling our treasuries because they would take such a big hit on their reserves. Looks pretty clear would actually take the hit if they did pull the trigger.

  47. diogeron says:

    We big apes can never underestimate the function of ideas, memes, and myths to < cognitive dissonance…..

  48. Tom Hickey says:

    jaymaster: “Treasuries also feed quite a few financial firms who sell and trade them. :)”

    Right. Since tsy issuance is operationally unnecessary in a fiat system, it constitutes a subsidy. It is dead weight that should be eliminated as wasteful on one hand and encourages unproductive rent-seeking on the other.

  49. Tom Hickey says:

    BR, just what don’t you get about “Warren’s math”? Some of us would like to hear the details instead of a back of the hand dismissal. Thanks in advance.

  50. TPC says:


    I’d highly recommend that you reconsider Warren’s math. It’s quite right. And more than a few of the great minds in economics today accept MMT as reality. Bill Black and James Galbraith are two that I’m sure you’re familiar with.

    You have to be fairly open minded to accept MMT, but it is the absolute best explanation of the current monetary system in which we reside. It’s extraordinarily mind bending if you don’t take some considerable time to understand it, but dismiss it at your own risk. These neoclassical myths that are perpetuated on a daily basis have helped to vault people like Sarah Palin to power. It’s time for Americans to stop living in fear and start accepting the reality of our monetary system.

    This might help:




  51. Tom Hickey says:

    It seems to me that it’s more accounting than math.

    The stock-flow consistent macro approach to sectoral balances, developed by Wynne Godley while at the UK treasury, functions in terms of national accounting identities. This is not even specific to MMT.

    Moreover, the assertion that in a fiat system, the government funds itself directly with issuance, therefore has no operational need to fund its expenditure with taxation or finance itself with debt, is definitional. This is operationally the case with any fiat system, regardless of what political restraints that may be imposed in the name of fiscal discipline in any specific instance. These restraints are voluntary rather than operationally necessary. While this may be unpalatable to advocates of “sound money,” it’s the way it is since Nixon closed the gold window in August, 1971. Again, this is generally recognized and is not MMT specific.

    Where there might be disagreement is over policy prescriptions. MMT’ers are Keynesian demand-siders, so their policy prescriptions tend to be “liberal.” But Warren Mosler was one of the first to propose a payroll tax holiday and in general is more prone to cut taxes than increase spending.

    On the other hand, Art Laffer, who was instrumental in developing supply-side Reaganomics, which G. W. H. Bush famously called “voodoo economics,” was using these same principles but with application to different policy objectives. Why do you think that the GOP supply-siders claim that “deficits don’t matter,” unless they result from policy to which they object?

  52. DeDude says:

    China sort of already has “pulled the trigger” on treasuries since their holdings of treasuries has stopped growing (although they still have the same trade surplus). That is why rates are not falling in spite of $0.6T worth of QE2. If they decided to sell their $1T we would get a QE3 program of..(drumroll)..$1T – to neutralize the effects of their selling.

    The debt is still a problem because every dollar in treasuries represent a future claim on $1 worth of work (or product). The most likely way that “we the people” will deal with the $14T of claims on future work issued by our government is not by direct default but by allowing inflation to make the individual dollar worth a lot less work/product. So the guy who get a 30 year treasure bill of $1000 today will collect much less than $1000 worth of work/product in interest and principal by the time all is set and done. It is sort of the default way when all the other solutions have been blocked politically.

    From what I can see, the MMT’ers didn’t come up with an alternative that negate what money is in the classic sense, they just expanded the view and point to another part of the elephant.

  53. gbgasser says:


    “The debt is still a problem because every dollar in treasuries represent a future claim on $1 worth of work (or product).”

    And if they didnt get the bond, they would still have the cash to make their claims. Issuing them a bond actually takes that cash out of circulation and makes it less of a “problem”. Stopping debt issuance would change nothing.
    The only way to reduce the claims which China has on our future production is to stop buying stuff from them and buy it from ourselves. Do you see THAT happening any time soon?

  54. Atlas says:

    Does it really matter who owns the debt? You can have a funding crisis without foreign involvement. Look at the situations in Ireland, Greece and Spain – it’s not foreign bondholders pulling the plug on the country.

    The current situation in the municipal bond market is also a domestic issue.


    The selling is done by local pension funds, U.S. hedge funds and mutual funds.

    I don’t take any comfort in the fact that the bonds are not held by foreigners. You can still have a funding crisis.

  55. DeDude says:


    I agree that printing a $1000 treasury bond or a $1000 bill is not much different. The only difference is that the bond pays some kind of interest to presumably at least compensate for inflation and, therefore, is more appropriate for the recipient to use as a long-term way of storing the future claim. If either party refused to use treasuries then China would presumably purchase assets in US as a way of storing their long-term claims (as they have done in part) or they could exchange their dollars for euros and store their future claims in those countries (as they also in part have done). I agree that in the long run foreign claims on our future production (trade deficits) cannot continue to grow without consequences. But the consequences for them will likely be at least as bad as the consequences for us. Look what happened to Japan and their plans to grow their economy by exports. I am a lot more concerned about the much bigger domestic claims on future production, because all the pain of settling those will fall on us.

  56. SANETT says:

    Maybe they’re not funding our government’s budget but they’re sure funding our personal spending. Trading all that good stuff for green pieces of paper (or the electrons they’ve become) is the greatest con game I’ve ever seen. If it ever gets hairy with them, we can just switch to blue. They have us right where we want them. China’s just the latest entry in the “they’re taking over the world” sweepstakes, previously entered into by Japan back in the 80′s and more recently the Asian “tigers” — they’ll do as well. Get your tennis shoes on the cheap while the party lasts.

  57. DeDude says:

    China is slowly beginning to wake up to the fact that there is a heavy tax on economic growth from export, because there is no way to preserve the wealth you store in a foreign currency (unless all are on a common gold standard).

    If you try to preserve the wealth from your trade surplus by pegging your currency, you induce inflation in your own country (and lose the domestic value of your foreign holdings that way). If you don’t peg then you lose value by your own currency getting stronger. If you try to preserve the wealth by putting it into commodities, you create a bubble in commodities (price increases that have no connection to supply-demand issues), so you end up purchasing them at a much higher price than you can recover when you want to sell them (after the bubble has burst). For most commodities you also get the added “bonus” of inducing inflation all over the world.

    A lot of what is seen currently in currencies, commodities and interest rates, can be explained by the Chinese government desperately trying to find a way of not losing the wealth they have accumulated by trade surpluses (and, therefore, have to store somewhere). They are desperately trying to find a way to avoid paying the price for large trade surpluses, but just like Japan they will sooner or later just have to pick their poison.

  58. gloppie says:

    “I could tell you, but you’re not going to like it” “This
    will all end in tears” -Marvin-

  59. macrosam says:

    It makes absolutely no sense to me that a monetary sovereign nation such as the US that has a monopoly on the issuance of its own non-convertible, floating rate currency and with all its obligations denominated in that very same currency would ever need to borrow that very same currency from another nation.

  60. endorendil says:

    The chart is interesting, but I can’t help but feel some nagging doubt about that big blue pie. If a Chinese or European company has a US subsidiary which invests its short-term cash in treasuries, does that get counted as a domestic ownership? Similarly, if a Citibank subsidiary holds treasuries for its clients in, say, Germany, does that get counted as domestic ownership? With the financial and corporate world thoroughly globalised it may be exceedingly hard to get real numbers on all this things. It’s not all that different from trying to track MBS and CDS holdings before the crisis in order to figure out who was going to suffer if it all went pear-shaped…

  61. endorendil says:

    macrosam, it doesn’t have to make sense for it to happen…

    The US government doesn’t actually care who lends it money, and so foreign nations, corporations and individuals can (and do) lend it money. The point of the discussion is whether foreigners control enough of the market that they could materially affect the government’s fiscal situation if they pulled out – either because they lose faith in the dollar or the US government, or for political motives. You’re correct that the US government can issue more debt, but if there are less buyers, it will have to pay higher interest rates. You’re correct that the Fed can create limitless amounts of dollars, but that would undermine the value of the currency. Think Zimbabwe, think Weimar: monetary sovereignty cannot save a nation from bad decisions.

  62. DeDude says:


    Think “collateral damage” and “unintended consequences”. The simple pain-free “solutions” almost always turns out to have some serious side-effects, that are worse than the problem they were supposed to solve. I think there recently was an african nation that decided to fund its operations by simply issuing more of its own currency – didn’t work out so well for them.

  63. Hey Tom,

    You said, “But Warren Mosler was one of the first to propose a payroll tax holiday and in general is more prone to cut taxes than increase spending.”

    Actually, more than 10 years ago, my book FREE MONEY called for an end to FICA, and there is also is an explanation at: Ten Reasons To Eliminate FICA

    Fundamentally, the myth that taxes pay for federal spending, is what has caused us to suffer an average of one recession every 5 years.

    Rodger Malcolm Mitchell

  64. DeDude,

    Zimbabwe’s problems had nothing to do with issuing currency. Robert Mugabe confiscated all white-owned farmland and gave it to people who did not know how to farm. Food production tanked, which predictably caused inflation. In response the government printed money which exacerbated the inflation.

    It is all too common for people to mention the names of countries that experienced hyper-inflation (pre-war Germany, Brazil, China, Italy et al) and without knowing anything about the specific problems, then proclaim that money printing caused the inflation. In Zimbabwe, and in most other hyper-inflated nations, inflation caused money printing and not the other way around.

    Since 1971, when we went off the gold standard, there has been no relationship between federal deficits (aka money printing) and inflation. See: Oil causes inflation

    Rodger Malcolm Mitchell

  65. DeDude says:


    I know you’re a fundamentalist believer in the religion of “free lunch”, but in the fact-based real world there is no such thing. Yes inflation can be stoked by more than one thing, but that does not change the fact that when you provide an excess of a specific product (money), the value of it fall. If not government could simply print a million bucks and sent it to each citizen – and then we would all be millionaires. Or they could hire us to each dig a hole and fill it up again for a million bucks (and then we would never again have to work because we would be millionaires).

    Not that I would deny that he issue of how an absurd supplies of money affects society is rather complicated. However, I know from previous experience that you are so far out in your single-minded fantasy world that a multifaceted reality-based debate is impossible. Any facts that may support your free-lunch-fantasy is accepted without question and blown up way beyond what it can really support. Any facts that challenge it, is immediately dismissed without the slightest reflection. I am sure that the endorphin highs you get from convincing yourself that the brilliant RogerMitchell has found the alchemist workshop must be extremely addictive – but you are the only one to experience them. So I will not waste more time on you than this short attempt at reaching the village idiot (or was to prevent others from starting to sniff his glue :)

  66. I’ve found that when people have no facts they resort to insults.

    To date, the federal government has created $13 trillion. Where is the inflation? I showed you data that indicates there has been no relationship between federal deficits and inflation, ever since we went off the gold standard in 1971.

    I never said the government should send everyone a “million bucks.” You set up a straw man with your “million bucks” analogy, but present no data to support your thesis. You do not supply data, probably because you have none. You seem to rely solely on intuition . . . and insults, neither of which is a substitute for data.

    Yes, supplying an excess of a commodity can cause that commodity to lose value unless you also increase the demand for that commodity. Do you know how to increase the demand for money? Increase interest rates, which is how the Fed has prevented inflation despite an astounding 3600% increase in Federal Debt.

    I encourage you to read Monetary Sovereignty as well as the writings of Warren Mosler and Randy Wray. You may find this effort enlightening.

    Insults will not gain you respect; data will.

    Rodger Malcolm Mitchell

  67. DeDude says:

    Don’t try to give yourself credibility by suggesting that Mosler and Wray are on your side. The best link is actually the one given by TPC http://pragcap.com/resources/understanding-modern-monetary-system That one both explain why we have to print money and where the limit on printing money is (before it creates inflation). It does not dig into use of interest rates to stop inflation created by printing to much money, because it would be like driving with the gas pedal to the metal and then using the brake to control speed (who would do that?).

  68. DeDude

    Far be it from me to give myself credibility to you. But you can email Warren at warren.mosler@gmail.com and see if he knows me — and then see if he knows you! :)

    Last time I saw Randy Wray was five years ago, when he invited me to speak at the UMKC, but we Email rather frequently. I met Scott Fullwiler there, at the time.

    Now that we have settled the credibility BS, what was there about the link you sent me that you yourself didn’t understand? It says essentially what I’ve been saying. The federal government has the unlimited power to create dollars. In the past 40 years, the debt has risen 3600% and there has been no relationship between deficits and inflation.

    So what has controlled inflation? Interest rates. Reduced deficit spending actually has caused every depression and most recessions.

    Welcome to “free lunch” (your words) crowd.

    Rodger Malcolm Mitchell

  69. Peter D says:

    When you say “increase interest rate” to fight inflation, you’re back to issuing bonds (in another name). MMTers mostly say don’t issue bonds at all (Mosler: “natural rate of interest is zero”)
    If I understand correctly this is one of the issues where you part ways with the MMT crowd.
    Also, do you see a limit to your recipe? I guess you do – after all, could it be that something will break if you ever have to raise the interest rate to some big % (say, 100%?). Do you have an idea under what circumstances your solution will break? Do you incorporate real resource (both natural and labor/productivity) constraints into your analysis?
    Thanks in advance

  70. Peter,

    The Fed controls interest rates through the Fed Funds rate. I long have said T-securities are unnecessary. I don’t understand Warren’s comment about “natural” rates.

    Yes, that is where I part ways with MMT. They want to cut deficits, an act which historically has caused recessions and depressions.

    If increasing interest rates were to prove insufficient to stop inflation, I would fall back to the MMT solution of reduced deficits. That would be an atomic bomb solution however, as it would risk causing a recession or depression, but if the problem is serious enough, I guess you need to resort to an atomic bomb.

    Money creation helps lift real resource constraints. That’s the fundamental purpose of money creation.

    Rodger Malcolm Mitchell

  71. beezer says:

    I (think) I understand MMT as described by Rodger M. Mitchell. To me it makes sense.

    That said, the discussion that is more important is one about the value of money. What dynamics are most important in shaping the real, or perceived, value of a currency?

    My stab at the answer? Composition, for lack of a better word. Robust, sustainable, economies are composed of activities that create real services and products of value. And it is these values that create currencies of value.

    From one statement by Mitchell above. ” Zimbabwe’s problems had nothing to do with issuing currency. Robert Mugabe confiscated all white-owned farmland and gave it to people who did not know how to farm. Food production tanked, which predictably caused inflation. In response the government printed money which exacerbated the inflation.”

    In other words, Mugabe first devalued the ‘value’ of farming (a productive part of composition), which in turn devalued his nation’s currency. A drop in agriculture goods produced would have inflated their price even without issuing more currency, in my opinion. Either way, issue currency or not, the consumer would have lost purchasing power.

  72. Spectre says:

    Government may not be “revenue constrained,” but they are theoretically “credit-constrained.” Potential creditors don’t want to lend to an entity (at prevailing interest rates anyways) if their appraisal of that entity leads them to believe there is too much money (claims on resources for that particular economy) sloshing around in the world… they might believe the risk of everyone in the world holding the said money will want to “redeem” it more or less at the same time that they wish to redeem their money, thus causing productive capacity issues (too much money chasing too few goods, i.e. inflation). When Milton Friedman asserted, “inflation is always and everywhere a monetary phenomenon” he was absolutely and positively correct. Nobody knows WHEN people want to “redeem” their money or WHAT they want to “redeem” it on.

    Presumably, ceteris paribus, the value of government debt (bonds) is based on the government’s credit quality. Credit quality, is based on the government’s ability to pay it debts. Presumably, the ability to pay off debt is based on some function of its cash flow, liquidity, solvency, and profitability. The government “making good” on claims against itself can either pay with cash from revenue (taxes), newly printed cash, or a combination of both. The issue isn’t whether the government running a deficit is wrong, the issue is whether government “action/spending” adds value to the economy (supports credit quality) or takes value away (hurts credit quality). If government action adds value, then concerns over government debt is unfounded. If government action destroys value, then concerns over government debt is founded.

    There is evidence to support the case that government adds limited value to the economy. There is a preponderance of evidence that supports the case that government in many areas is wasteful, unecessary and is at best, an impediment to the creation of value. It is finding the proverbial “sweet spot” structure of government, freedom and capital that yields prosperity.

    With the current structure we have today, it is my belief that the U.S. is wrongfully overweighting government, underweighting freedom and underweighting capital. I believe individuals are sovereign and should have the right to create and issue their own “money” and freedom to transact in that money with others if they so choose. With this proposed system the value of “money” = your individual credit worthiness. That is, the willingness of people to lend you resources, is based entirely on your ability to pay back resources to the people who “credited” them to you. In essence we do this now, but with centralized monopoly money and credit. If government needs resources then perhaps it could just have a small two tier negative resorce flow tax: one rate for abled bodies and minds and a smaller rate for disabled bodies and minds.

    Why negative resource flow? The theory is that it would encourage people to allocate their resources to a more efficient arrangment sooner rather than later, supporting a healthy and vibrant economy. Remember you can “print” your own “money” to pay for things, even taxes. So if you decided to pay your taxes by printing new “money” you’re just creating more claims against yourself and giving them to government. If government comes to you to redeem your “money” and you are unable to fulfill the implied promise by paying out resources, you can do one of two things: 1) Inflate your prices to better ration claims against yourself and risk a decrease in your credit worthiness or, 2) Default on your “money” (debt), go into bankruptcy, liquidate assets and give any proceeds to creditors and receive a decrease in your credit worthiness.

    In this proposed system you can also “structure” your money however you want. Perhaps you decide to structure your “money” like options contracts where they expire after a certain date. Suppose you print new “money” structured this way and pay your taxes with it. Suppose the government comes to you after the expiration date on your new “money” trying to redeem it, what happens? Nothing happens, you paid the government with your legal “money” and it failed to redeem your “money” before the expiry date stamped on the “money” when you paid your taxes with it. You keep your resources, the government gets nothing in this case. (Admittedly, in such a scenario, it is likely laws would probably be enacted to require a minimum length of time to pass before any new “money” could expire.)

    If you think about the issuance of “money,” it is really a mechanism for control. You need the governments “money” because it forces you to through legal tender law. As long as government has control over the issuance and use of “money” it has control over the people. Government may have “legal control” over “money,” but the people have given it a long-time to get it right and it has demonstrated its incompetence time and again. It’s time people assert their individual sovereignty and demand congress to legalize the issuance and use of alternative monies.

  73. [...] started with a brief note in a Barry Ritholtz column a few of weeks ago (http://www.ritholtz.com/blog/2011/01/is-china-really-funding-the-us-debt/) when he pointed out that China is not, in fact, holding us hostage by their investment in U.S. [...]