system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: Why do we borrow money from China and give it to countries like Pakistan

How exactly is the juice worth the squeeze?
gpt
We don't do anything similar to that.

What you're referring to is bond sales and foreign aid, two topics that are merely tangential to each other.

Foreign aid is a topic in diplomacy and international relations. It's got both moral and pragmatic dimensions to it. On the one hand, the moral argument goes that those who have more should do more. It's pretty simple, and no different really from the basic moral arguments for charity or generosity … or even hospitality, when you get right down to it. The pragmatic argument is that foreign aid prevents conflicts.

Deficit spending is a *completely* different kettle of fish. It basically works like this: There are two ways, generally speaking, in which governments can fund their activities. One is taxation, and the other is the sale of bonds. All extant governments (worth talking about, anyway) use both of these methods in combination. Taxation is just what you think it is: taking money from the populace through the authority of law. But there are obvious downsides to that approach, both philosophical and economic. So taxation only gets you so far.

Bonds, however, are clear-cut. When a government wants to spend some money — whether it be on buying an aircraft carrier or paying the salaries of a police force or building a school to replace a madrassa in, yes, Pakistan — it issues a series of bonds and sells them on the open market. Anybody can buy bonds. In the United States, about half of all the outstanding Treasury bonds — nearly $8 trillion worth — are held by the government itself, one agency buying bonds from another in order to move money from bank account to bank account. So those really don't count, in any meaningful sense.

Of the rest of the bonds, the largest share — about $4 trillion — is held by *us,* the American people, in one form or another. Over $1 trillion of that is held by individual US citizens who have bought and own US Treasury bonds as personal investments. The rest is held by domestic institutions, like mutual funds, pension funds, insurance companies, state and municipal governments, commercial banks, credit unions and so on.

And the other quarter? That's held by those same kinds of holders — institutions, private citizens and governments, and most prominently central banks — in other countries.

So what about China's share? China's central bank holds about a quarter of the foreign-held US Treasury bonds — the largest share held by any one party, but just 8% of the total sovereign debt.

And *why* does China's central bank hold US Treasury bonds at all? Because US Treasury bonds are more valuable than yuan. The Chinese central bank can do a better job of managing China's economy if it converts as much of its cash reserves into negotiable instruments of stable value, and US Treasury bonds are the most stable negotiable instruments on the planet. If the US didn't sell Treasury bonds, China's central bank — as well as the central banks of Japan, Brazil, the UK, Switzerland, Taiwan, Russia and all the other economies that currently use the dollar as their preferred reserve currency — would just go shopping for the next best investment and put their money into that instead.

So long story short? The US sells Treasury bonds — "borrows money," if you like, though that's a really misleading way of looking at it, since it implies we're talking about personal debt — because there's a *huge* demand for them, and the revenue from bond sales lets the US do more each year than it could do if it relied on tax revenue alone. Since the American people generally agree — at least right now — that their government should be doing more rather than less, the sale of bonds is a very lucrative way of funding all those extra activities that we couldn't do if we just spent tax dollars.

And yes, one of those *myriad* extra activities is building schools to replace madrassas in Pakistan.