Americans enjoy a higher material standard of living as a result of the Chinese holdings of US government debt.
Answer: True
The answer is True.
We are considering the macroeconomic outcomes only in this question. We might have concerns about the distributional consequences within the US that might arise from an on-going external deficit - that is that some might benefit while others will be losing jobs as manufacturing heads to China. But when we think in macroeconomic terms (which is mostly the case in this blog) we are dealing with aggregates and so the distributional questions, while very important, are abstracted from.
That qualification also has to be tempered by the important insights that progressive economists such as Michal Kalecki who showed how the distribution of income impacts on aggregate demand.
Please read my blog post - Michal Kalecki - The Political Aspects of Full Employment (August 13, 2010) - for more discussion on this point.
But with those caveats in mind here is the explanation.
First, China can only do what the Americans and everyone else it trades with allow them to do. They cannot sell a penny's worth of output in USD and therefore accumulate the USD which they then use to buy US treasury bonds if the US citizens didn't buy their stuff. Presumably, people buy imported goods made in China instead of locally-made goods (which are more expensive) because they perceive it is their best interests to do so.
There is often a curious inconsistency among those who advocate free markets. They hate government involvement in the economy yet propose complex regulative structures (for example, tariffs) which would increase government control on resource allocation and, not to mention it, force citizens (against their will) to purchase goods and services they reject in an open comparison (on price and whatever other characteristics).
Many economists do not fully understand how to interpret the balance of payments in a fiat monetary system. For example, most will associate the rise in the current account deficit (exports less than imports plus net invisibles) with an outflow of capital. They then argue that the only way the US (if we use it as an example) can counter this is if US financial institutions borrow from abroad.
They then assume that this is a problem because it means, allegedly, that the US nation is "living beyond its means". It it true that the higher the level of US foreign debt, the more its economy becomes linked to changing conditions in international credit markets. But the way this situation is usually constructed is dubious.
First, exports are a cost - a nation has to give something real to foreigners that it we could use domestically - so there is an opportunity cost involved in exports.
Second, imports are a benefit - they represent foreigners giving a nation something real that they could use themselves but which the local economy will benefit from having. The opportunity cost is all theirs!
Thus, on balance, if a nation can persuade foreigners to send more ships filled with things than it has to send in return (net export deficit) then that is a net benefit to the local economy. I am abstracting from all the arguments (valid mostly!) that says we cannot measure welfare in a material way. I know all the arguments that support that position and largely agree with them.
So how can we have a situation where foreigners are giving up more real things than they get from the local economy (in a macroeconomic sense)? The answer lies in the fact that the local nation's current account deficit "finances" the desire of foreigners to accumulate net financial claims denominated in $AUDs.
Think about that carefully. The standard conception is exactly the opposite - that the foreigners finance the local economy's profligate spending patterns.
In fact, the local trade deficit allows the foreigners to accumulate these financial assets (claims on the local economy). The local economy gains in real terms - more ships full coming in than leave! - and foreigners achieve their desired financial portfolio. So in general that seems like a good outcome for all.
The problem is that if the foreigners change their desire to accumulate financial assets in the local currency then they will become unwilling to allow the "real terms of trade" (ships going and coming with real things) to remain in the local nation's favour. Then the local economy has to adjust its export and import behaviour accordingly. If this transition is sudden then some disruptions can occur. In general, these adjustments are not sudden.
So if you understand this then you will be able to appreciate the following juxtaposition:
Here is a transactional account of how this works which starts off with a US citizen buying a Chinese product.
What if the Chinese car company then decided to buy US Government debt instead of holding the US dollar-denominated bank deposits?
Some more accounting transactions would occur.
If you understand all of that then you will clearly understand that this merely amounts to substituting a non-interest bearing reserve balance for an interest-bearing Government bond. That transaction can never present any problems of solvency for a sovereign government.
The US consumers get all the real goods and services and the Chinese have bits of paper.
I know some so-called progressives worry about the stock of debt that the Chinese are holding. But the US government holds all the cards. The debt is in US dollars and they never leave the US system.
The Chinese may decide they have accumulated enough and will seek to alter the real terms of trade (that is, reduce its desire to export to the US). In that situation the US will no longer be able to exploit the material advantages and the adjustment might be sharp and painful. But that doesn't negate that while the situation is as described the material benefits are flowing in favour of the US citizens (overall).
The following blog posts may be of further interest to you: