ps, peruse any college textbook on “Money and Banking” and you’ll see that the Federal Reserve and U.S. Treasury control the number of dollars in circulation via two functions:
1. Adjusting bank reserve requirements (not applicable to this topic).
2. Buying and selling U.S. Treasuries.
The U.S. Treasury takes dollars from the Japanese or Chinese and gives the Japanese or Chinese U.S. Treasury securities in exchange. That is how the Treasury keeps excess dollars out of circulation.
Japanese purchases of MBS, stocks, and real estate are different. The Japanese or Chinese give an individual or corporation dollars, and the individual or corporation deposits those dollars in a bank. The bank then makes loans against those dollars. Thus, the originally-held-by-Japanese-or-Chinese dollars remain in circulation.
Dollars received by the U.S. Treasury (in exchange for U.S. Treasury securities) reduce dollars in circulation; dollars received by individuals (in exchange for MBS, stocks, real estate) have no effect on dollars in circulation.
