@crescendoofpeace. You are right about the Fed and the U S government. To stay in power the government must spend more than it receives in tax receipts. To do that they borrow the difference from the Fed. They give the fed promissory notes called Treasury Bonds with a 3% interest rate. This represents the money they borrow from the Fed. As for the Fed, they just print the money that the government wants to borrow. Imagine if you could just print money and lend it out 3% interest! Parties all round.

Sounds wonerful right? Everyone gets something for nothing.

Not so fast.... The Fed has decided that it is now so rich, it doesn’t need any more 3% bonds. It simply does not know what to do with the money coming in the door. They call it a “big Balance Sheet”. They want to shrink it. So the Fed has decided it will lend a little less to the US government. Every month as $500 billion of US government bonds mature, they will only reinvest $480 billion back into new Treasury Bonds.

This is great for the Fed (plenty of dosh to spend on dolly-bird secretaries with PHDs in economics).

However, it is very bad for the US Government. If the Fed won’t lend them money, who will? Not me. I’m not locking my money up for 30 years in a bankrupt government.

No doubt the Chinese will oblige - that’s assuming they don’t decide to use their $3 trillion stash of Treasury Bonds as the final weapon mass destruction in the Trump initiated trade war.

As for China weaponising its reserves of US T-bonds, I think they are smarter than that. Turkeys don’t vote for Christmas (unless they are in the UK.)