Not even that. Federal spending is not "funded" by tax money. Indeed, the IRS destroys the money it collects. The federal government finances spending by printing money. Taxes are just to create demand for money, and to control inflation.

Ah, another tinfoil hat.

Sorry, this is logically incoherent. If a foreigner buys US bonds, they have less US cash, leading to lower dollar denominated prices in their markets. Supply and demand. Part of the problem here is misunderstanding that "inflation" means an increase in price levels, regardless of changes in the money supply. Just increasing the money supply is not "inflation" although it may lead to it, again via supply and demand.

The problem now is a debt overhang which is hampering growth by depriving banks of profitable lending opportunities, and depriving the private sector of its ability to innovate and invest. After private balance sheets are repaired and full employment is reached, I will begin to favor deflationary policies.

You should look up the Plaza Accord and reverse Plaza Accord.

We are already giving tons of money to the Chinese in exchange for goods. If they wanted to turn around and spend those dollars here, they could. Instead, they turn them into bonds in order to manipulate FX prices and to capitalize their banks. Keep in mind that as a result of Chinese demand for US paper, we are trading them our official stamps for their sweat, toil and natural resources, which we consume instead of they and which they can never recover.

The misunderstanding this AC has, is that redeeming a bond adds to the net financial assets of the bond holder. This is false. If I have $100 in bonds, then on redemption my $100 in bonds is destroyed, and replaced with $100 in reserves. The only difference is the interest rate. Just redeeming bonds (or buying up bonds China is willing to sell) can't change the net financial assets of the private sector, and is thus very unlikely to lead to inflation.

Real rates are calculated by subtracting inflation from the nominal rate. E.g. if inflation is 2% and the rate on a US bond is 1.75%, then folks are paying the US government to safely hold their money a -0.25% (realistic numbers at the present time).

There are some rare inflation adjusted debt instruments, for example the US Treasury sells TRIPS which are inflation-protected securities. AFAIK in the USA and most other countries, nearly no debt is inflation protected.

Since that's pretty much what I said, I assume you meant to reply to Lotana in explanation of why we're right...

If outstanding bonds are redeemed, their balance becomes reserves. Relatively more plentiful reserves will induce relatively higher bids on new issues of US Treasury debt, that is, relatively lower rates. This is the supply-and-demand mechanism by which quantitative easing reduces Treasury rates.

The Fed can always set the yield curve on Treasuries by buying bonds from the private sector (and setting IOR) such that takers receive a spread. If some institutions don't like those terms, they can try to collude to keep rates up, but there is a prisoners' dilemma in that the first one to break ranks will reap the gains.

It would be even simpler for the Fed to control rates if we altered the Federal Reserve Act to allow direct purchases of Treasury debt (such as are allowed by most countries).

Not really. To explain, our 'social security' is an intergenerational assurance program (those who currently work transfer some potential consumption to those currently retired), implemented through a so-called payroll tax (6.2% collected from employees and employers up to the first $117,000 earned only) which is used to sock away bonds as internal debt. So 12.4% of wages are taken from the private sector and placed into this trust. The 12.4% doesn't cover all the benefits that get paid, but interest income will make up the difference probably for about another decade. After that, the payroll taxes will have to pay benefits directly (at about 75% the level of current benefits) unless we allow social security to be paid from discretionary deficit spending instead of the trust fund.

To summarize, no matter the general price levels or rates on US Treasury debt, social security provides for 12.4% of wages to be diverted from workers to retirees. No matter what, any form of old age pension requires workers to abstain from consuming some goods, transferring them instead to retirees. Assuming for the moment that retirees should be supported by society, the question then is what proportion should be transferred. Under current US law, the proportion is greater than or equal to 12.4% (plus I think 2.9% for Medicare).

Agreed - but we were talking about Russia and/or China causing the devaluation, right?

From a US perspective, both dollar devaluation and dollar revaluation can be seen as positive. The former increases employment and domestic production, while helping debtors, and the former increases our ability to import the production of others and benefits creditors.

Really? How do you think we pay off our debts now? You realize that fixed-term Treasury instruments are constantly coming due and being redeemed, right?

The truth is that a (Federal government) debt instrument is the money that pays itself off. $100 of securities disappear, $100 of reserves take their place. No change in net financial assets.

So, no, there is no harm in "printing" money to "pay off" these "debts." We do it all the time. As a result, of course, there is no need to worry much about the national debt, or to destabilize things by trying to pay them off rapidly.

All the US money (bonds and dollars) we have were "printed." Every year that the Federal gov't runs a deficit, it prints that amount of new money. And yet, no inflation crises materializes.

Which Americans? Inflation may cost our wealthy creditors, but it will help the much, much larger part of us who have mortgages, student loans, car loans, credit card debt, business loans, etc. - especially considering that our economic growth is currently hampered by a persistent debt overhang caused by a deflationary credit crises.

Also, higher inflation will server to reduce the trade deficit by disincentivizing imports in favor of domestic alternatives, and by making our exports cheaper in foreign markets. Both of these effects will increase domestic production and employment.

A sale requires two parties. Why would it be worse for us if, say, European nations (or other developing economies like India and Brazil) hold our paper instead of Russia and China?

Especially since Russia and China would have to sell at a loss to induce potential purchasers to buy...