
The $1.4 Trillion Question (What will China do with their massive US dollar holdings?) - toffer
http://www.theatlantic.com/doc/200801/fallows-chinese-dollars
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mynameishere
A few of the privations of the Chinese were listed: Heating, housing,
vegetable oil, and a clean environment. I'm not sure if these things are
related to trade imbalances so much as overpopulation.

So China is holding a lot of bad paper. I don't know why in god's name you
would buy debt from the US when it's basically low-yield junk, and has been
for a while. The old saying is: When you owe your banker a 1000 dollars,
you're in trouble. When you owe him a million dollars, he's in trouble. So
China's in trouble.

Their odd dollar-centric twist on mercantilism isn't likely to help them in
the long term: Once the export markets (and jobs) dry up, the people will have
all the iPods they want, but the heating/oil/living space/environment problems
aren't likely to be solved.

~~~
jorgeortiz85
The privations of the Chinese people are related to trade imbalances because
if the Chinese government allowed their huge trade surpluses to go towards
buying goods (heating, vegetable oil, etc) for the Chinese people (thereby
reducing trade surpluses), then most Chinese people would have higher
standards of living.

Instead the Chinese government forces these trade surpluses to go towards
buying US Government bonds (i.e., lending money to the US Government in
exchange for low returns (negative returns if you factor in the exchange rate
and inflation)). This doesn't raise standards of living for the Chinese
people. In fact, it loses them money.

Yes, when you owe a banker a million dollars, he's in trouble. But he's only
in trouble when you declare bankruptcy. At which point, he may be in trouble,
but you're in bigger trouble.

And that may be the only way out of this financial mess... The US Government
declaring bankruptcy. That would mean China is in $1.4 trillion worth of
trouble, but the US would be in a lot, lot, lot more trouble.

~~~
anamax
> The US Government declaring bankruptcy. That would mean China is in $1.4
> trillion worth of trouble, but the US would be in a lot, lot, lot more
> trouble.

The Chinese can't foreclose.

The most significant result of the US govt declaring bankruptcy would be that
folks would stop lending it money, at least for a while. (Folks have a
surprisingly short memory for this sort of thing. Argentina has defaulted a
couple of times.)

That would be a good thing as long as it lasted.

~~~
marvin
Argentina defaulting can hardly be compared to the US defaulting. I am no
economist, but I doubt the US economy would ever be the same if it suddenly
decided not to repay any of its foreign debt.

Argentina's GDP today is about 1/60 that of the US, and it is hardly a huge
player internationally. When they defaulted, 93 billion 2001 US dollars were
lost by its creditors. The United States foreign debt (omitting
Medicare+Social Security obligations and, unfairly, the more direct debt to
its public) is 4000 billion 2007 US dollars.

That's a monumental difference, and not paying it back would be a historic
violation of trust bordering on an act of war. Argentina _did_ get in a lot of
trouble for its decision to default, and it doesn't seem very likely that the
world would forgive a similar, but 30 times larger, transgression from the US.
It is not an option. If anything like that happened, it would be indirectly
(such as being caused by a dollar crash)

~~~
jorgeortiz85
Except defaulting on the foreign debt would also mean defaulting on the entire
national debt. That would pretty much screw up the entire US financial system.

Of course, what's more likely is inflating away the debt (i.e., devaluing the
value of the dollar, and thus all dollar-denominated assets). There may not be
foreclosures, but there will be a clearance sale on US assets. 90% off!
Everything must go!

------
__
"In effect, every person in the (rich) United States has over the past 10
years or so borrowed about $4,000 from someone in the (poor) People's Republic
of China."

Uh, no. I get the feeling that the author doesn't really understand how trade
surpluses and deficits work.

~~~
toffer
Why do you disagree with that statement? If China has lent $1.4 trillion to
the US Government (by buying US Treasury Notes), then if you divide it out on
a per capita basis, that works out to roughly $4000 per US citizen.

~~~
jorgeortiz85
You mean China _LENT_ $1.4 trillion to the US Government (by buying US
Treasury Notes).

~~~
toffer
Oops. Thanks for catching this. Maybe I shouldn't debate late at night...

(I fixed my post above so that it actually says the point I was trying to
make, rather than the opposite.)

