[BobbyJo]

> It's mostly in forms of treasuries purchased in USD that pay in USD - this means the indebtedness creates a huge amount of dollars abroad that foreigners have to then spend on US services, driving demand.

Strangely enough, this is exactly the opposite of how it works. The dollars abroad tend to stay abroad, as either a more stable alternative to local currencies, or a reserve currency. Likewise, treasuries held abroad tend to stay there as reserves. This is how the US is able to run both a huge debt, and a huge trade deficit. If the dollars were being repatriated, the trade deficit would close, and the influx of money would cause hotter inflation. Same with treasuries, yields would spike as demand fell.

There are lots of second order effects there, good and bad, but, basically, those dollars not coming home has funded America for quite some time.

[CraigJPerry]

I, a foreign entity, have sold something to an american and now have 10 dollars and zero treasuries.

I purchase a treasury. I have zero product, zero dollars and one treasury.

At some point in future i have zero product, maybe 12 dollars and zero treasuries. Presumably i now either repeat the cycle or use my winnings to spend on us output.

GP’s version checks out, your assertion about dollars staying abroad doesnt track? What am i misunderstanding - How did these dollars get abroad, how did they repatriate to buy treasuries, how did a treasury become a reserve, how did the dollars still exist abroad after being exchanged for treasuries?

[carbonguy]

> I, a foreign entity, have sold something to an american and now have 10 dollars and zero treasuries.

Or you sold something to a non-American entity in a dollar-based market, eg. oil. The dollars do come from America to begin with, but once they get "out there" they work as a medium of exchange for whoever wants to use them for that purpose.

[DangitBobby]

> Presumably i now either repeat the cycle or use my winnings to spend on us output.

What you are missing is that these dollars can be circulated indefinitely in the global economy without ever repatriating, because they are valuable and useful as actual currency. They may never come back to the US.

[ezconnect]

Because the world trades using US dollars. Country A needs to buy something from Country B. Country A needs to buy/get dollars to buy stuff from Country B. Country B will not accept anything but dollars or gold for its products because it also needs to buy other stuff like oil in dollars from other countries.

[raincole]

> Presumably i now either repeat the cycle

Most of the time this is exactly (foreign or not) institutions do.

Think about it, if the 10-dollar treasury is due and you got your money back, the US debt will go down by 10 dollars. However, in our reality, the total amount of US debt almost never goes down.

Of course some interest will be used in other ways, like spending on the US goods or staying as cash to provide liquidity. But at the end of the day, the most popular way to spend the money got from due treasuries is... to buy more treasuries.

[locknitpicker]

> Strangely enough, this is exactly the opposite of how it works. The dollars abroad tend to stay abroad, as either a more stable alternative to local currencies, or a reserve currency.

I think you have it backwards. The US dollar can be handled as a more stable alternative only if it's actually stable. As soon as the US government starts to deteriorate goodwill and outright be hostile towards the world, not only does the US dolar lose its value as a stable alternative but foreign governments start to be motivated to dump their assets, which further tanks its value. In the past couple of weeks we started seeing countries outright dump their investments in US dolar to derisk their portfolio, and they did it at the tune of billions of dollars. You also started to see political pressure for foreign governments to demand their gold reserves are pulled out of the US, which means this pressure goes way beyond US dollars.

[BobbyJo]

> I think you have it backwards.

I don't understand how your argument here goes against mine. If anything you're arguing that I am correct, but things are changing.

[bertjk]

If dollars were being repatriated, but as investment into financial instruments and real estate instead of purchases of goods and services, then that would not affect the trade deficit, right?

[BobbyJo]

I don't believe so. I don't think foreign equity and real estate purchases are counted in trade balance. Those assets never leave the US as exports.