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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: c.hinton who wrote (261049)	4/9/2008 12:04:50 PM
From: TimF	Read Replies (1) \| Respond to of 281500

China doesn't set interest rates. A more accurate description of your tactic is that they could just decrease their purchase of new t-bills. That would have the effect of exerting upward pressure on the interest rates. They would then have to do something else with their dollars. In theory they could do something ridiculous like take delivery in cash, and sit on (or even burn) the cash, but that would mean (esp. if they burn it) that they where essentially giving us their products for free. They want a positive real return, not the negative (because of inflation) return that sitting on a pile of cash would bring, or the 100% loss that burning the cash would bring. So they would invest it elsewhere. They could loan the money to the US private sector rather than the government, or they could buy US stocks, or buildings or whatever, but they would still be funneling the money in to the US. They could instead shift the money to Europe or elsewhere, but if a bunch of dollars are dropped in to Europe, than the Europeans aren't going to sit on them or burn them either. Which isn't saying that reducing purchases of future t-bills might not have a negative effect on the US, but the weapon isn't as simple, and likely isn't quite as powerful as it might first seem.