The Buzz: Why China keeps on buying U.S. debt

Here's how the media and most of the economic mainstream perceive foreign buying of U.S. Treasuries...

"China added to its big position in U.S. debt during the month of April, according to the latest figures from the Treasury Department. So did Japan. And the U.K. And the big bloc of oil exporting nations that includes Venezuela, Iraq, Iran and Saudi Arabia. All told, foreigners increased their net holdings in Treasury bonds and notes by more than $76 billion. What did you expect them to buy? Euros?"

Check out that last line: "What did you expect them to buy? Euros?"

The author is so confounded by the foreign buying of Treasuries (after all, the U.S. has HUGE debts and is about to receive a credit downgrade any day, at least that's how most of these guys think), that he's practically at a loss to explain the reason for all this buying. In the end he basically throws his hands up in the air and says it's because it's just worse everywhere else.

Pathetic reasoning.

There's one reason and one reason alone that China, Japan, Saudi Arabia and other countries buy Treasuries and that reason is, when the U.S. runs fiscal deficits those deficits add to the savings of the non-governmental sector (domestic and rest of the world) to the penny.

In other words, if the U.S. government rusns a $1.3 trillion deficit, then the non-government (domestic and rest of the world) took in $1.3 trillion in new money. That's how it works as a matter of accounting. Think about it, the government spent $1.3 trillion more than it took in. Where did that money go? Into the pockets of people here in the U.S. and around the world.

Foreigners as well as many Americans keep that money in Treasuries because it earns them a return. Operationaly, the way it works is that the dolars are simply switched from a checking account at the Fed (where they're held) to a savings account at the Fed, which is called, a Treasury. That's it!

So it's not because the U.S. is the best house in the worst neighborhood that the Chinese, Japanese, Saudis, Venezuelans and others buy Treauries, but rather, because fiscal deficits of the U.S. are equal but opposite to the surpluses of the private sector here and in the rest of the world. Government balances and private sector balances must sum to zero.

And they do.

THAT's the explanation.