Friday, March 13, 2009

DIGGING A HOLE ALL THE WAY TO CHINA

Fairly interesting post from Yves about China's posturing regarding its holdings in, and future purchases of, US Treasuries.

As many of you know, China holds astonishing amounts of US debt. A debt that we will never be able to pay back, should China and other creditors "call" for repayment. Even more frightening, in a sense, and certainly more important in the short term, is China's continuing commitment to buy more treasuries. If they don't, how can we continue to pay our bills? Service our ever-growing debt?

One way, of course, is to raise taxes to the roof. Apart from any questions about the undesirability of doing so, it's unlikely you'll see anyone in DC do that, for purely political reasons. Another is to slash spending. That ain't happening. A third possibility would be for US businesses and citizens to buy treasuries themselves. They have been for a while now. But -- especially with the market experiencing bear market rallies like the one we're seeing this week -- who's gonna loan money to an insolvent borrower for less than 1% interest? Knowing that the borrower can pay you back only in its reserve currency, which it has grossly devalued over the past 6 months (and will likely continue to do)?

Maybe I'm missing something here, but the only scenario I see going forward is for the Federal Reserve to start buying US treasury debt. Monetizing the debt, as they say. And when that happens, that means trillions of dollars worth of brand-new, created out of thin air, fiat currency will start to seep into the economy.

Can you say Inflation?

Anyhow, check out the post.

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3 Comments:

Blogger DED said...

And with all of the posturing going on in the South China Sea, how soon before China makes a play for Taiwan? Clinton already downplayed the importance of pressing for human rights in China in light of current economic problems. They could easily say, "You want us to keep buying your debt? Then step away from Taiwan."

11:45 AM  
Blogger Smitty said...

Can you say Inflation?

This is exactly correct.

They could easily say, "You want us to keep buying your debt? Then step away from Taiwan."

I really believe that this is China's foreign policy regarding U.S. relations. They know they have us by the balls and are thrilled to keep covering for us, because it means they own our posture towards their domestic policy. A very deft move on their part, and we are eager as always to let them do it.

3:07 PM  
Blogger Mike said...

They could easily say, "You want us to keep buying your debt? Then step away from Taiwan."

They could. I doubt they will . . . now. But wouldn't surprise. Stranger things have happened in world history. Debt leads to bad things. Always has, always will.

7:57 PM  

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