The important question is: “Where and how did the foreign central banks get the dollars they invested in Treasuries?” The answer, of course, is from the U.S. trade deficit.

Most U.S. economists, including Brad, see the trade deficit level as controlled by the activities in the U.S. financial system, including the level of domestic saving.

I do not. For years, I have followed the implications of the assumption that the level of the U.S. trade deficit is controlled by market just like any other good or service. I agree that the market is rigged. That does not change causation. Whatever controls the market for overseas goods for sale in the U.S. and for U.S. goods for sale in foreign lands, it is the interaction of the markets that control the size of the trade deficit.

All the financial issues that Brad discusses are derived from the results of market choices made by real people.

When the situation is viewed from this perspective, one does not blame a foreign country for investing funds they earned by exporting for using these funds as they see fit. Once the money is sent overseas to pay for imports, it is overseas property.

Like so many other practices that bedevil the U.S., purchase of Treasury certificates with money earned from excess imports was pioneered by the Japanese. In the 1980’s, the U.S. public grew insenced when it was revealed that a Japanese businessman was contemplating purchasing Rockfeller Center. After that, the money sent to Japan to pay for imports in excess of exports was quietly invested in Treasury certificates, which the general public would ignore.

The unbalanced system is sustained by the round trip of dollars. But the flow begins in the U.S. If the round trip is causing problems, the place to correct the problem is where it begins, with the excess purchases of imports over sales of exports.

Trying to interupt the flow in midstream, after it is in Japan or China, is silly.