Thursday, January 31, 2008

Economic Cold War Looming with China -- Atlantic Monthly

Really worth reading. The "partnership" with China is the biggest economic gamble since the revolutionary war.
I like how he puts it in cold war terms. If either side pulls the plug, we're both screwed.

Atlantic Monthly Chinese Dollars Jan 08 article

Chinese can't dump their hundreds of billions without devaluing the US currency. Lower US currency not only devalues the US debt (mostly treasuries) they already hold, but also makes their products more expensive to Americans.

It's as if you went to a store and bought a TV. When you try to pay for the TV, the store owner says "why don't you hold on to it for me. Safe keeping." Now you have enough cash to buy a stereo and the owner does the same thing. You're basically buying stuff for free, which means you have the cash to buy more stuff. You owe him a lot of money, but if he collects, you ain't buying anything else.
The article argues that the Chinese population pays the price. The average person in the US has a TV and Stereo they bought with money borrowed from the average Chinese person who doesn't own squat.

Something that bugs me: Throughout history, when one country has a huge and growing debt they can't repay to another country, they generally find a reason to declare war (and cancel the debt). That would be no fun



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