Throughout the 2000s and 2010s, economists and seemingly everyone else couldn’t stop talking about how much money the USA “owed” to China. The sentiment was so ingrained that it became a plot point of Gary Shytengart’s truly stupid novel Super Sad True Love Story —Chinese creditors “calling in their loans” to America. The idea lent itself to numerous creative metaphors—e.g., the “Chinese credit card,” something that a haughty Huffington Post moderator insisted that multiple U.S. administrations had used to finance everything from the Iraq War to the 2009 stimulus.

Ok, I’ll admit that the amount of money China has loaned the USA is staggering. Are you ready to hear the amount?

It’s $0.

A money printer doesn’t need to borrow

You’re likely wondering how this is possible. I mean, you may have heard about how America has gotten “trillions” of dollars from China. But before I explain why this is a convenient fiction, ask yourself two questions:

Where is China getting its U.S. Dollars?
Why is the U.S. government borrowing in a currency that it can create any amount of?

The USA is the sole issuer of U.S. Dollars, a fiat currency that can be issued at any time and in any amount. China is not printing any dollars. So there’s your answer to the first question.

The second one is a little weirder because, as per the answer above, the U.S. government doesn’t need bonds (or taxes, for that matter) to fund itself. There’s no reason to borrow if you have a money printer. Basically, it’s just selling them to help set an overnight interest rate and to pay interest to people who want and need it, such as pension plans or mercantilist regimes (like China) that need to recycle their dollars. The interest that bond holders get paid by the government doesn’t strain the budget, because it can always be afforded—after all, it’s denominated in dollars.

These bonds are called U.S. Treasury securities, or “Treasuries.” Until the late 2010s, China was the top holder of these instruments; they’ve since been surpassed by Japan and the UK, which has had the effect of deflating the “Chinese credit card” discourse, although it still comes up as a potential weapon that China could wield against the USA, i.e., selling all its debt.

“Borrowing” is a misnomer

The terminology here—that China holds American “debt” that we have to “repay” because we “borrowed” it—is misleading because none of the transactions here are at all similar to household borrowing. The process goes something like this:

The USA creates new dollars to purchase goods or services from China.
Once received as payment, these dollars go into what is essentially a “checking account” that China has with the Federal Reserve, i.e., the institution that actually issues all U.S. Dollars.
China moves this money from its Fed checking account to the equivalent of a Fed savings account, i.e., a Treasury that pays interest.

That’s it! Now, explain how the U.S. “owes” anything here. This is nothing like credit card debt!

The rationale for the rhetoric

So why do we hear so much about how we “owe” all this money, or how we’re passing down debt to our grandchildren and so on?

It’s mostly ideological. The U.S. center and right wings want to limit our horizons by acting like we’re too “indebted” to do anything. They’d prefer a world in which the government is hemmed in by fake concerns about the need to “tighten its belt”.

There’s also the issue of the European Union, which many economists either assume is the norm for how currency regimes work and/or see as superior to the profligate “indebted” USA. But countries such as Greece that use the euro face a completely different set of constraints than the U.S., China, Russia, the UK, or any other sovereign issuer of fiat currency.

That’s because they don’t control the central bank—the European Central Bank is not something they can commandeer to print more money as needed. They really can face a situation in which they wouldn’t be able to supply the euros to fund themselves.

Ont be other end of the spectrum from the EU is Japan, which has long been the bane of mainstream western economic theory. Despite running enormous “debts”, Japan has low interest rates and a very high standard of living. This is because the Bank of Japan buys Japanese Government Bonds, showing that debt management it’s all a policy game rather than something dictated by an exogenous, apolitical “market.”

Ignore the national debt

Now that China is no longer the biggest buyer of Treasuries, we don’t hear quite as much about how much we “owe” them. But we still hear a lot about the national deficit and the debt.

They’re nothing to worry about. All government debt is someone else’s asset—it has to be, because it’s just money that’s been spent. The national “debt” is really just a ledger of private sector prosperity—all the dollars that have flowed into households and businesses. This is why the few times that the government ran a surplus—like in the 1920s and 1990s—presaged economic disaster: Money was being sucked out of the private sector.

So yeah, debt in your household is a real thing, but the U.S. government is not a household and it can never go “bankrupt.”