The Fed makes a liquid market for Treasury debt by purchasing them from banks with the issue of dollars that banks then hold as reserves. The liquid market gives greater incentive to others, including foreigners, to buy and hold Treasury debt as an asset.
With the dollars earned from the sale of goods and assets they have produced, the Chinese people could either buy American goods or American assets, including Treasuries. If they buy assets, they are expressing their lower time preferences to earn the rate of return on their American investments. Technically, this lowers their standard of living, i.e., the consumer goods they enjoy, in the present, which they are willing to do to get higher standards of living in the future. Americans express their higher time preferences by consuming more goods in the present than if the Chinese were demanding present goods more heavily.
What’s been more common than the Chinese people buying Treasuries is that the Chinese government taxes the Chinese people to buy U.S. Treasuries. This lowers standards of living for the Chinese people in the present and in the future. The greater command the U.S. government has over resources then reduces the standard of living of Americans in the present (fewer consumer goods) and in the future (fewer investments in the capital structure).
I don’t think Americans get to consume without producing. It is true that whoever has the power to issue legal tender, fiat paper money can consume without producing. So the U.S. government can consume without producing by issuing fiat money. But Americans are not the beneficiary of this wealth transfer but its victims, along with foreigners.
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