Why does Japan and China lend to America? Can’t us just make more money?

Printing the money to avoid borrowing is technically possible but economically catastrophic: it would ignite inflation that would hurt every American far more than the debt does.

Why they lend in the first place

Both countries sell enormous amounts of goods to American consumers. All those exports earn them dollars. That cash has to go somewhere, and US debt is an in-demand asset. It is safe and convenient. As the world's reserve currency, the dollar is extensively used in international transactions, trade goods are often priced in dollars, and they can easily be converted.

There's also a self-preservation angle. During the Asian Financial Crisis, several Asian nations saw incoming investments crash dramatically. In response, Japan, China, and other Asian nations began maintaining large precautionary rainy-day funds of foreign exchange reserves, which include US debt.

China has an additional, structural reason. China buys US debt due to its complex financial system. The central bank must purchase US Treasuries and other foreign assets to keep cash inflows from causing domestic inflation. A country like China, which saves more than it invests domestically, is typically an international lender, and to avoid inflation, the Chinese central bank removes incoming foreign currency by purchasing foreign assets, including US Treasury bonds, in a process called "sterilization."

So they're not doing it out of generosity. They do it because it serves their own economic stability.

How much are we talking?

Japan holds $1.1 trillion in US debt, nearly double China's $618 billion. That is real leverage. The last thing the global financial system needs is a fire sale on US government debt, yet the biggest threat hanging over the $29 trillion Treasury market is Japan and/or China either selling or buying fewer US government bonds just as Washington needs ever more financing.

Why you can't just print the money

The question is fair and almost everyone has asked it. The short answer is that printing money doesn't create real wealth, it just dilutes the money everyone already has.

"The answer, in one word, is inflation," says Alan Cole, senior economic policy analyst at The Conference Board. Inflation is "the binding constraint on governments, in the end, that keeps them from issuing gobs of currency and buying whatever they want with it."

Here's the mechanics: when there's an increase in the money supply without a corresponding increase in economic activity, there's a decrease in the purchasing power of each individual dollar. Each dollar buys less because there are so many more dollars circulating in the economy. You didn't create more wealth; you just made each dollar worth less.

In effect, printing money to pay back debt is like a hidden tax. The government isn't taking dollars directly from people. It's reducing the value of the dollars they already have.

And it can spiral fast. If people start expecting that the government will print money to cover its spending, inflation expectations can spiral. Businesses raise prices in anticipation, workers demand higher wages, and inflation becomes self-reinforcing. The extreme version of this is hyperinflation, which has destroyed economies in Zimbabwe, Weimar Germany and Venezuela, countries that tried exactly this.

There's one more problem the printing press creates. People who bought government debt, those who lent the government money, would see a fall in the value of their bonds. If there was hyperinflation the value of the bonds would become worthless. Japan and China would never lend to the US again, and neither would anyone else. The cost of everything the US borrows in the future would skyrocket.

The US can print its own money, but it can't print real goods, real services or real trust. Those have to be earned.