Monday, February 08, 2010

Economic M.A.D.


As one looks at the past to predict the future, I think one tends to misread the Chinese / USA relationship. It is nearly unique.
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In terms of debt, I think Chinese buying our debt did not start occurred deliberately to gain advantage. I think China purchased US debt originally to keep money flowing that went to Chinese imports. Then, dependent on those imports, they had to keep purchasing debt to lift the US dollar artificially high versus their currency.
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Now China owns TONS of our debt. There is a lot of talk about how China can drive up or down the price of the dollar, and how they may use this as a club if we do something they don't like.
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Well, yes it is true - technically, but it will ruin them as well. They have purchased too much debt and their economy is tied to the US dollar doing well. If they hoard and stop buying for any length of time, the US economy and the world's crashes too. China can't afford a world crash and the discontent that goes with it.
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If they decide to dump all their dollars, and the value plunges, well they have trillions of dollars in debt valued in US dollars that suddenly is essentially worthless. They still have to import energy and raw materials, so wiping out trillions of their own funds is illogical.
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Some people (and think tanks) think China is willing to do stupid things for national pride or to make a point. This may be true over a short period of time. But long term they have proven to be a very rational international player.
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No,they won't screw the pooch. I think we have stumbled into a Mutually Assured Destruction scenario with China out of pure dumb luck. If we actually go to war (economic or military and perhaps cyber) both economies and countries hit the toilet really quickly. And, unlike Nuclear MAD that we had with Russia, we can both see the effects of this as we begin to ramp up. It is a MAD that allows us to, hell will FORCE us, to stop and look at where we are going.
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It might be the best possible outcome someone could think of! We are going to be forced to work together over the long haul.
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This isn't to say one or the other of us might not do something asinine (we still have Congress and they still have internal politics) - but I think level headed leaders on both sides know that we have accidentally got in the boat together. We may yell at each other, but we are stuck with each other.
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(Actually there is one near parallel with the US and the UK pre-WWII. When UK was at war with Germany, the US had money, but not the debt, we agreed to take the UK's debt when we were going to enter the war - with the specific agreement that the US Dollar would be the basis of the world economy AFTER the war. But the US never precipitated the conflict with the UK.)