Comment by BobbyJo
4 hours ago
> It's mostly in forms of treasuries purchased in USD that pay in USD - this means the indebtedness creates a huge amount of dollars abroad that foreigners have to then spend on US services, driving demand.
Strangely enough, this is exactly the opposite of how it works. The dollars abroad tend to stay abroad, as either a more stable alternative to local currencies, or a reserve currency. Likewise, treasuries held abroad tend to stay there as reserves. This is how the US is able to run both a huge debt, and a huge trade deficit. If the dollars were being repatriated, the trade deficit would close, and the influx of money would cause hotter inflation. Same with treasuries, yields would spike as demand fell.
There are lots of second order effects there, good and bad, but, basically, those dollars not coming home has funded America for quite some time.
I, a foreign entity, have sold something to an american and now have 10 dollars and zero treasuries.
I purchase a treasury. I have zero product, zero dollars and one treasury.
At some point in future i have zero product, maybe 12 dollars and zero treasuries. Presumably i now either repeat the cycle or use my winnings to spend on us output.
GP’s version checks out, your assertion about dollars staying abroad doesnt track? What am i misunderstanding - How did these dollars get abroad, how did they repatriate to buy treasuries, how did a treasury become a reserve, how did the dollars still exist abroad after being exchanged for treasuries?
> I, a foreign entity, have sold something to an american and now have 10 dollars and zero treasuries.
Or you sold something to a non-American entity in a dollar-based market, eg. oil. The dollars do come from America to begin with, but once they get "out there" they work as a medium of exchange for whoever wants to use them for that purpose.
> Presumably i now either repeat the cycle
Most of the time this is exactly (foreign or not) institutions do.
Think about it, if the 10-dollar treasury is due and you got your money back, the US debt will go down by 10 dollars. However, in our reality, the total amount of US debt almost never goes down.
Of course some interest will be used in other ways, like spending on the US goods or staying as cash to provide liquidity. But at the end of the day, the most popular way to spend the money got from due treasuries is... to buy more treasuries.
If dollars were being repatriated, but as investment into financial instruments and real estate instead of purchases of goods and services, then that would not affect the trade deficit, right?