Randy Wray: What If China Dumps US Treasury Bonds? Paul Krugman Inches Toward MMT

Yves here. While I agree with Wray’s post, there’s a small caveat I wish he had included: China will continue to take US dollars as long as it exports to the US. There does not appear to be any near or intermediate term risk of that changing. Ironically, the US and other advanced economies have been urging China to rebalance, as in generate more of its demand for its manufacturing capacity internally and export less. China has not made much progress in that direction. Japan was also encouraged in the 1980s to become more consumer driven. Instead they managed to engineer an bubble and bust, and only Abenomics (not necessarily by design) has led to a reversal of the island nation’s long-standing trade surpluses.

By Randy Wray, a professor of economics at the University of Missouri, Kansas City. Cross posted from New Economic Perspectives

Our deficit hysterians love to raise the specter of China. Supposedly Uncle Sam is at the mercy of the Chinese, who have a stranglehold on the supply of dollars necessary to keep the US government above water. If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default.

Can anyone, please, explain to me how the sovereign issuer of the US dollar—Uncle Sam—could ever run out of his supply of dollars? Please, give me one coherent explanation of how that could happen.