Friday, March 13, 2009

China Could Destroy the US

I'm a little surprised it took this long to come out, but from the headline China Worried about US Treasury Holdings,

China's premier didn't say it in so many words, but the implied warning to Washington was blunt: Don't devalue the dollar through reckless spending.

"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

China has lent more money to Washington than any other lender, with loans totaling an estimated $1,000,000,000,000 (that's a trillion). Right now the dollar is relatively strong, as people are buying treasuries since they are considered to be the safest of all investments. The strength of the dollar is keeping inflation at bay.

So what would happen if China were to begin a concentrated effort to sell their treasuries? This could begin a wave of mass selling of treasuries at their current high price in order to lock in profits. This selling would have a couple effects. First, the price of treasuries would fall, which would make it more expensive for the government to borrow money, and would induce further selling of treasuries. Second, as foreign entities cash in their treasuries, they would want to convert dollars into another currency. This selling of the dollar would weaken the currency. The entire problem could become a downward spiral that would lead to a large devaluation of the dollar, which in turn would lead to an inflation problem.

As was stated in the paragraphs above, China could decide that holding treasuries is too risky for their liking and begin selling. Another reason China may begin selling is discussed further along in the article,

Wen expressed confidence the world's third-largest economy can meet its official growth target of 8 percent this year and emerge from the crisis "at an early date." But he said Beijing is ready to expand its 4 trillion yuan ($586 billion) stimulus if needed.

"We already have our plans ready to tackle even more difficult times, and to do that we have reserved adequate ammunition," he said. "That means that at any time we can introduce new stimulus policies."

Communist leaders worry about rising job losses and possible unrest amid a trade slump that saw Chinese exports fall 25.7 percent in February from a year earlier. They have promised to spend heavily to create jobs and boost exports.

In other words, China could decide that their money is better suited by spending within their own economy rather than collecting a minuscule amount of interest from the US Government.

The decisions China makes regarding the US debt that they hold could be the deciding factor for the direction the finances of the US take. This is something to watch and be wary of.

Questioning Politics

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