The $1.4 Trillion Question (What will China do with their massive US dollar holdings?) | Hacker News Reader

The $1.4 Trillion Question (What will China do with their massive US dollar holdings?)

theatlantic.com

13 pointstoffer11 comments

A few of the privations of the Chinese were listed: Heating, housing, vegetable oil, and a clean environment. I'm not sure if these things are related to trade imbalances so much as overpopulation.

So China is holding a lot of bad paper. I don't know why in god's name you would buy debt from the US when it's basically low-yield junk, and has been for a while. The old saying is: When you owe your banker a 1000 dollars, you're in trouble. When you owe him a million dollars, he's in trouble. So China's in trouble.

Their odd dollar-centric twist on mercantilism isn't likely to help them in the long term: Once the export markets (and jobs) dry up, the people will have all the iPods they want, but the heating/oil/living space/environment problems aren't likely to be solved.

The privations of the Chinese people are related to trade imbalances because if the Chinese government allowed their huge trade surpluses to go towards buying goods (heating, vegetable oil, etc) for the Chinese people (thereby reducing trade surpluses), then most Chinese people would have higher standards of living.

Instead the Chinese government forces these trade surpluses to go towards buying US Government bonds (i.e., lending money to the US Government in exchange for low returns (negative returns if you factor in the exchange rate and inflation)). This doesn't raise standards of living for the Chinese people. In fact, it loses them money.

Yes, when you owe a banker a million dollars, he's in trouble. But he's only in trouble when you declare bankruptcy. At which point, he may be in trouble, but you're in bigger trouble.

And that may be the only way out of this financial mess... The US Government declaring bankruptcy. That would mean China is in $1.4 trillion worth of trouble, but the US would be in a lot, lot, lot more trouble.

My point is simply that iPod factories and soybean fields are not fungible. China has an unnatural industrial base, that doesn't suit the purposes of its population--it reminds me somewhat of the forced industrialization of the USSR, which worked great at singlemindedly producing tanks and rocket launchers. But now they have a shakey, unbalanced oil economy, while Germany and Japan (nominal losers) are both much healthier.

> The US Government declaring bankruptcy. That would mean China is in $1.4 trillion worth of trouble, but the US would be in a lot, lot, lot more trouble.

The Chinese can't foreclose.

The most significant result of the US govt declaring bankruptcy would be that folks would stop lending it money, at least for a while. (Folks have a surprisingly short memory for this sort of thing. Argentina has defaulted a couple of times.)

That would be a good thing as long as it lasted.

Argentina defaulting can hardly be compared to the US defaulting. I am no economist, but I doubt the US economy would ever be the same if it suddenly decided not to repay any of its foreign debt.

Argentina's GDP today is about 1/60 that of the US, and it is hardly a huge player internationally. When they defaulted, 93 billion 2001 US dollars were lost by its creditors. The United States foreign debt (omitting Medicare+Social Security obligations and, unfairly, the more direct debt to its public) is 4000 billion 2007 US dollars.

That's a monumental difference, and not paying it back would be a historic violation of trust bordering on an act of war. Argentina _did_ get in a lot of trouble for its decision to default, and it doesn't seem very likely that the world would forgive a similar, but 30 times larger, transgression from the US. It is not an option. If anything like that happened, it would be indirectly (such as being caused by a dollar crash)

Except defaulting on the foreign debt would also mean defaulting on the entire national debt. That would pretty much screw up the entire US financial system.

Of course, what's more likely is inflating away the debt (i.e., devaluing the value of the dollar, and thus all dollar-denominated assets). There may not be foreclosures, but there will be a clearance sale on US assets. 90% off! Everything must go!

"Bordering on an act of war" in hyperbole.

Yes, it would be a huge financial loss for those holding bad paper (and the US could pick and choose what paper became useless - including discriminating by ownership) but what can they do other than yell and refuse to lend again?

Yes, they could impose economic sanctions and kill their export market.

"In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People's Republic of China."

Uh, no. I get the feeling that the author doesn't really understand how trade surpluses and deficits work.

Why do you disagree with that statement? If China has lent $1.4 trillion to the US Government (by buying US Treasury Notes), then if you divide it out on a per capita basis, that works out to roughly $4000 per US citizen.

You mean China _LENT_ $1.4 trillion to the US Government (by buying US Treasury Notes).

Oops. Thanks for catching this. Maybe I shouldn't debate late at night...

(I fixed my post above so that it actually says the point I was trying to make, rather than the opposite.)

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