China is not our banker.

MYTH #4: What we don't tax we have to borrow from the likes of China for our children to pay back.

Reality: Paying our debt holders back consists of transferring funds between accounts.

One constantly hears that the Chinese (and other external creditors) "fund" our deficit. The folklore is that when China finally sells off its US bond holdings, those yields will sky-rocket. The dollar will then crash, no one else will want the debt, and it will be the end of America as we know it.

To debunk this myth, you need to know two things. First, all foreign governments have checking accounts at the Federal Reserve Bank called "reserve accounts." Second, US Treasury securities are nothing more than savings accounts at the same Federal Reserve Bank.

How does China get its dollars? It sells things to us. And when China gets paid, those dollars go into China's checking account at the Federal Reserve Bank.

And when China buys US Treasury securities, what happens? The Fed transfers China's dollars in its checking account at the Fed to its savings account at the Fed. We call that "borrowing from China" and "going into debt to China." But it's not really "borrowing" in the sense of creating an external constraint whereby we have to defer spending to "pay back" China. The Fed simply pays off China's "debt" by transferring the dollars, plus interest, back to the holder's checking account, which it can create at the stroke of a keyboard as the monopoly issuer of dollars.

The dollars are nothing more than data entry on the Fed's computer. They have no other existence. And it has no impact on the government's ability to spend as to whether China's dollars are in their checking account or savings account.

All we owe China is a bank statement that shows them where their dollars are. Sadly, they know this. But they also know that we think we are dependent on them, and take advantage of our error.

~Marshall Auerback, Senior Fellow at the Roosevelt Institute and Warren Mosler, President, Valance Co.