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