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Comment by cbernini | Hacker News Reader

but the big problem for you guys is: it's expected that China holds something around 1 trillion of the US GDP in treasury bonds. So whenever they feel the US economy isn't trustworthy anymore, selling these will hit like a train.

their growth rate is really high right now, so it's a delicate situation.

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The problem is not even in selling. They would need someone to sell to. Once China stops buying it will be the beginning of the spiral down in the prices of US bonds.

China is the only emerging market that needs the US economy going and for the American consumer to keep its purchasing power. China can only stop buying when their domestic market gets big enough to sustain the hit that it will eventually come.

The Chinese can't stop buying bonds if they want to keep their currency depressed relative to the dollar. Moreover, they have no intention of stopping the gravy train - tanking the US economy (further) would only hurt their own largest market, and no other large market is as willing to accept one-sided trade and currency policies as the US.

The Fed bought up 1 trillion in mortgage debt and no one blinked -- that is why mortgage rates are 4%. If China started dumping their T bills the Fed would just buy them up. It wouldn't hit like a train -- more like a tricycle.

But the U.S. can't do that forever without inflation, because they either have to cut spending (which wouldn't happen due to fears it might affect unemployment and the economy), raise taxes (same deal, and is even more of a political mess), or print money. Printing money in bulk over and over leads to inflation. Inflation causes people to slow spending.

They are printing money to directly manage interest rates and indirectly manage inflation. If the Chinese liquidate the debt they own, the Fed printed money to buy the debt, and Chinese spent the money employing americans eventually that might cause wage inflation. That process seems slow enough that inflation would be no big deal to manage.

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