Based on how politicians across parties have railed against the deficit, it’s understandable why anyone would get enraged when thinking about our government behaving imprudently. Whether the policy debate is health care, infrastructure, education, or climate change, the same question inevitably arises: But how are you going to pay for it? This bumper sticker captured a real frustration and anxiety that exists over our nation’s fiscal affairs, particularly with the size of the federal deficit. Like the driver with this bumper sticker, many people have come to believe that our government is flat broke and that its budget is unable to tackle the most important issues of our time. He wore red-and-white striped pants, a dark-blue jacket, and a top hat adorned with stars. It featured a man, standing slightly hunched, with his pants pockets turned inside out. I remember when I saw a bumper sticker on the back of a Mercedes SUV in 2008 while I made my one-hour commute from Lawrence, Kansas, to my job teaching economics at the University of Missouri in Kansas City. It’s what you know for sure that just ain’t so. It’s all accomplished using nothing more than a keyboard at the New York Federal Reserve Bank.It ain’t what you know that gets you into trouble. To pay back China, the Fed simply reverses the accounting entries, marking down the number in its securities account and marking up the number in its reserve account. It’s still just sitting on its US dollars, but now China is holding yellow dollars instead of green dollars. “Borrowing from China” involves nothing more than an accounting adjustment, whereby the Federal Reserve subtracts numbers from China’s reserve account (checking) and adds numbers to its securities account (savings). It does this by purchasing US Treasuries. Uncle Sam doesn’t pay interest on the dollars China keeps in its checking account at the Fed, so China usually prefers to move them into what is effectively a savings account at the Fed.

Like any other holder of US dollars, China has the option to sit on those dollars or use them to buy something else. Americans paid for those goods with US dollars, and those payments were credited to China’s bank account at the Federal Reserve.

“The difference gave China a $420 billion trade surplus (the US carried the opposite, a $420 billion trade deficit with China).

The deficit myth book