Does the US Government Borrow From China?

Mainstream economics views China's holdings of U.S. Treasury securities as the U.S. government borrowing from China to finance its spending. When the government runs budget deficits, it must issue debt to cover the shortfall between spending and tax revenues. China, through its central bank and other institutions, purchases these Treasury bonds, effectively lending money to the U.S. government. This relationship is often portrayed as creating dependency, where the U.S. owes China money and China could potentially dump its holdings, causing problems for U.S. interest rates and fiscal policy.

MMT reveals this framing fundamentally misunderstands government finance operations. The U.S. government doesn't borrow in any meaningful sense - it creates dollars when it spends and destroys them when it taxes. When China 'buys' Treasury securities, they're simply exchanging one type of dollar-denominated asset (bank reserves) for another (Treasury bonds). As Warren Mosler explains, this is more accurately described as China opening a savings account at the Federal Reserve rather than lending to the government. The Treasury securities China holds are not funding U.S. spending - they're just interest-bearing alternatives to holding non-interest-bearing reserves. China cannot force the U.S. to do anything by selling these securities, as the Fed can always purchase them, creating new reserves in the process. The real constraint on U.S. government spending is not China's willingness to 'lend' but the availability of real resources in the economy and the risk of inflation.