I was having a conversation with my brother last night and we were trying to figure out how exactly countries go into debt to each other. Say the US borrows money from China. What does this mean? Do they give us US dollars? Where do they get it? Can they just print/mint more yuan and give it to us? Is this even real? We couldn't figure out how it made any sense exactly.
For example if there was me, my brother, and my girlfriend in a room. My brother wanted to buy a soda from me for $1 but he didn't have it, so he borrowed it from her. She can give him $1 and then he buys the soda from me. But we can't create cash, so it works. But how does it work between countries when a country can just print/mint more money? What are they giving us and how do they know we will uphold the debt? Do we owe them yuan? How do they know what we owe them actually has value if it's not backed by anything?
So confusing. It seems like it's just smoke and mirrors!