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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Perspective who wrote (251076)7/18/2003 5:49:35 PM
From: mishedlo  Read Replies (1) of 436258
 
From Plunger in response to your AG post which I seem to have lost.
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The paradigm of US spending their capital and China accumulating it seems to suit everyone. The US citizens enjoy affluence. The Chinese enjoy accumulating wealth.

But it is a replay of the 1860s when the Chinese sold stuff but wouldn't buy things. It was on a small scale compared to today and the result was a war before it all got out of control.

Today it is already out of control and based on the current rules the Chinese win IMO, because they end up rich but the US ends up debtors to them.

There are many ways to play out the game - but they all have to involve the Chinese not continuing to accumulate wealth without recycling it. Options seem to be

1. They simply start spending. Pretty much solves the world's economic problem in one go. But it doesn't seem to be in their nature.

2. Abrogation. The US simply refuses to accept Chinese claims. This could well lead to war and certainly would be the end of world trade for a while.

3. Partial default. Say the US imposes witholding tax on foreign held US-issued securities.

4. Debasement. This is default by stealth and what BC is saying. I would be surprised if the Fed went along this path without full executive branch approval because it would affect domestically-held securities just as much as foreign-held ones ... but maybe they have it. No love lost between Bush and the Chinese!

Plunger.
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