It doesn’t though.

Bonds were necessary in the fixed exchange rate regimes to take money out of the circulation every time the government spends, otherwise there would be too much money in the system and the exchange rate gets wrecked.

In the floating exchange rate system today, there is no longer a need for governments to issue bonds because exchange rate… floats.

US treasuries are simply savings instruments that allow rich people to earn interests (free money), and it also serves to drain excess reserves in the banking system to target a particular interest rates (though there are other ways).

Every time the US government spends, that $$$ exists permanently in the system until all of them have been taxed back (destroyed at the Treasury), and those $$$ that have not been taxed back and remained circulating in the system (private sector) is registered as National Debt.

In fact, following this logic, the US National Debt is simply a measure of the collective desire of the world to save in US dollars. If nobody wants to save, then all of the $$$ will get taxed back and the National Debt falls down to zero.

Let me give you a very simplified example of how this works:

Country A wants to import consumer gadgets from Country B, so it deficit spends A$1000 and give it to Country B. In return, Country B ships consumer gadgets to Country A.

How did Country B get paid in A$? Simple, Country B’s exporter and Country A’s importer both have bank accounts in Country A, and both banks have special reserve accounts within the Central Bank of A, so they have access to the special reserves pool held within the Central Bank of A.

To initiate payment, the reserves are transferred from the importer’s bank (reserves -A$1000) to the exporter’s bank (reserves +A$1000), and the corresponding deposits account of the importer is debited (balance -$A1000) and the exporter credited (balance +$A1000).

Now that Country B’s exporter have +$A1000, they have to make a decision, and there are really only two decisions: SPEND or SAVE.

Let’s walk through the sub-options here:

1. SPEND - import other goods from Country A - money goes back to Country A citizens
2. SPEND - import goods from Country C - money goes to Country C citizens, who will arrive at the same decision point
3. SPEND - purchase property/factory in Country A - money goes to the seller in Country A
4. SPEND - purchase A$-denominated stocks/securities - money goes to seller of stocks/securities
5. SPEND - convert to B$ (e.g. to pay employees at home) - exporter sells A$1000 to the Central Bank of Country B (who also have a bank account in Country A), money goes to Central Bank of B, who then creates a corresponding B$ at their home country and deposits into the bank account of B in country B. Money remains in the hand of Central Bank of Country B - who will now similarly have to choose between SPEND or SAVE.
6. SAVE - purchase A$ government treasuries to earn interests (free money)
7. SAVE - leave in deposits account - the exporter’s bank (with reserves +A$1000) now uses that reserves to purchase A$ government treasuries. In this case, the bank gets to earn interests instead of the exporter.

Let’s say Country B chooses option 2 and uses that A$1000 to import raw materials from Country C, then the bag is simply passed along to Country C.

Country C then chooses to import medical devices from Country D, and the A$1000 is now passed to Country D.

Finally, Country D chooses to SAVE that A$1000 instead of spending that money, and so it purchases the government bond from Country A, effectively closing the loop.

(NOTE: in the real world, this cannot go on forever because at every transaction point, a % of the original A$1000 is taxed away, so unless someone decides to save at some point, all of that will eventually be taxed away and the deficit spending aka National Debt of Country A will be zero.)

From the perspective of mainstream economics, it would appear that Country A borrowed A$1000 from Country D, then used that to import from Country B.

It would seem that if Country D hadn’t lent to Country A, it would not have been able to afford the consumer gadgets from Country B. But this is getting it entirely backwards.

If you have followed the flow of the money above, it is very clear that Countries A, B, C all received real goods, while Country D received a financial asset.

Country A had to spend first before Country D can “lend” that money (the same money that came out and went back to the same Treasury of Country A, after going for a ride across Countries B, C and D). At every point, each of the countries will have to make a decision from the number of options listed above: to SPEND or to SAVE. Along the way, Countries A, B, C chose to enjoy actual goods, while Country D is satisfied with saving the money in the form of an interest-bearing savings instrument.

Also if you have been paying attention, none of the money ever leaves the Central Bank of A. It is simply shifting reserves inside the Central Bank, while the banks credit a corresponding amount of money (matched 1:1 to the government money) they received in the reserves to the deposits accounts in the outside world.

So what if nobody wants to save in A$? Then everyone will simply pass the bag along. At each point, some of the A$ will be taxed back into the Treasury of Country A, until all of that is eventually taxed away. When that happens, the deficit of Country A falls to zero, and so did its National Debt.

In the real world, what will happen if every foreign country stops buying US treasuries is that the exchange rate of the dollar will fall, because other countries are no longer propping up the dollar exchange rate. When that happens, new problems will then arise: the exchange rate of the exporting country will become stronger in relative terms, their exports are now more expensive, and the exporting country will have to decide how to maintain the volume and competitiveness of its exports, either by adjusting the exchange rate, lower production costs/wages paid to workers, eat the losses, or find a new buyer to sell their goods to.

I like Roberts’ writings but he really needs to stop talking about things that are only applicable to the gold standard era (almost all of his critique on MMT is moot because of his inability to understand how floating exchange rate system works), because it really makes him sound like he doesn’t understand how international trade and finance work, and this is especially so on topics about China.