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Published by: Diversion Books on May 21, 2012
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Six Myths That Hold Back America by Frank Newman
Chapter 1Myth #1Asian nations are bankrolling the U.S.
The U.S. as a nation is often characterized as a “borrower” in need of supportfrom Asian “lenders.” We hear statements that the U.S. government
needs Asianfinancial support for issuance of Treasury securities and that the U.S. financial system
needs dollars to be “returned” from Asia. But when this author has spoken with people in
China who have responsibility for investing the dollars, they expressed a very differentview: they knew they had dollars, accumulated from trade surpluses, which had to be
invested. They were not talking about “lending” to support America. They spoke only
about investing the dollars wisely in a complex and competitive global market.
 The myth often portrays the U.S. as a nation and a government dependent on the
goodwill of Asian nations in order to avoid “running out of money.” It suggests that large
amounts of U.S. dollars have
 been “moved” outside of the U.S., and that the U.S. is indire need of the return of those dollars to America. Let’s look behind those assertions, at
the flows of money.Countries that sell more goods and services to the U.S. than they buy from theU.S. end up with trade surpluses in U.S. dollars. If they really do not want to have U.S.
dollar (“USD”) assets, they could buy more goods from the U.S. and thus reduce or 
eliminate the trade surplus with America. But many countries like having such a tradesurplus if possible, which means that they will have U.S. dollar assets. What can they dowith the dollars they own? The USD money could be left in U.S. bank accounts, asoriginally received, or invested in various other forms of USD assets.
Fish Live in Water, and U.S. Dollars Live in Banks in the U.S.
Travelers can carry dollar bills across borders, but of course in modern timespaper money represents only a small portion of total money and of transactions in thebanking system. Most transactions are paid using demand deposit accounts (checkingaccounts) at commercial banks. The banks themselves use accounts at the Federal
Reserve banks to hold their “reserves,” and to transfer money from bank to bank. Weknow that the expression “move money” is not really refe
rring to physically movingmoney
carrying around bags of cash
but it is often misunderstood. Dollars do notactually move to another country. What does change is how many dollars are in whichU.S. bank accounts. So for example, if Miss Jones pays Mr. Smith $100 by writing acheck to him, and they both have accounts at the same bank, then the bank simplyreduces the checking account of Miss Jones by $100 and increases the account of Mr.Smith by the $100. If they have accounts at different banks, then the same result is
achieved through the two banks’ accounts at the Fed: the account of Miss Jones is
reduced and the account of Mr. Smith is increased, by the same $100.
Money is Never Consumed
 No money is “used up”; the banking system simply records a change in
ownershipof that $100. Person A may feel his or her $100 is gone, but it has just been added toanother account at a U.S. bank member of the Federal Reserve System. For the U.S.banking system as a whole, the amount of money remains unchanged.Similarly,
when people talk of “moving” money to another country, we know that
does not mean transporting huge amounts of hundred dollar bills across the ocean in giantsuitcases. In fact, dollars never leave the U.S. (other than the small amount of papercurrency carried by travelers). They cannot leave the U.S., by definition. The essence of the U.S. dollar is an obligation of a bank in the United States that has an account with theFed. So, for example, if an American retailer buys some products from an Asian producerand pays for them with U.S. dollars, the ownership of that block of dollars is recorded asnow owned by an Asian account holder instead of an American, at a bank in the U.S. Nomoney is used up, and no money leaves the U.S. When the Fed publishes figures on theU.S. money supply, such as M1 and M2, it adds up the total amount of deposits in all theFed member banks in the U.S., regardless of which depositors are American or foreign.That is what U.S. dollar money means.Even if a foreign owner of U.S. dollar deposits thinks of having some of thosedollar deposits in a bank in its own country, that is not really quite right. In fact, if agovernment entity or company or person somewhere in Asia has a bank accountdenominated in dollars in a local bank, that bank is an intermediary, with an arrangementwith a correspondent bank in the U.S. The dollars are actually held at the U.S. bank .
 Theoverseas bank and the bank in the U.S. have an agreement under which the U.S. bank holds dollars in a U.S. account for the benefit of the foreign bank. Dollars never leave theU.S.; the amount of dollars in different accounts changes, but dollars cannot leave the
U.S. banking system nor be “used up”. That leads us to the main conc
lusions regarding
Myth #1…
What Foreigners Can and Cannot Do with U.S. Dollars
When foreigners own dollars from their trade surpluses, there are only threethings they can do with the dollars: they can buy American goods and services; they caninvest in USD assets; or they can exchange dollars for assets in another currency
inwhich case the new owner of the dollars will have choices one or two.When a foreigner buys or sells U.S. dollars, that does not change the total amountof dollars in the system; it simply moves the ownership of a block of dollars from one
account owner’s U.S. bank account to another. The money supply can be reduced or 
increased in the U.S. by the Fed, or by banks making loans, but not by the Treasury andnot by foreign owners of dollar assets. When the Treasury issues securities, it receivesmoney paid by investors from their bank accounts, and then distributes the money in the
normal course of the Treasury’s business, to pay government bills, employees, etc. The
Treasury just causes movement of money from one set of bank accounts to other bank 

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