Question about US/china relations

[The Truth]

A poster in another thread said, "Also, when you talk about "cutting off the money supply", you're talking about destroying the global economy. Its economic mutually assured destruction."

My question is how would China selling off its US dollar holdings and refusing to let US go futher into debt yield mutally assured destruction?

I am having problems understanding the dynamic. I understand that the value of the US dollar would drop extremely sharply. China's total exports would go down because the US couldn't afford to import nearly as much. However, China isn't exactly "gaining" anything from its excess exports to the US at this point anyway, right (besides more dollars that they cant get rid of without causing mutally assured destruction)?

Can anybody explain what would happen in this situation (or at least educated speculation)?

[iversonian]

The US would find it very hard to finance its debt (govt bonds continually mature and they have to keep rolling it over, along with issuing new debt), so the interest we would have to pay would go way up. The value of China's holdings would drop sharply (when interest rates go up, bond prices go down), so they would get a much lower return than the otherwise might have gotten by not dumping all their US bonds.

[kimchi]

[ QUOTE ]
or at least educated speculation

[/ QUOTE ]

The way I see it at the moment is that China exports goods to The US and the US exports printed pieces of paper to China in return.

These are IOUs that I expect can't be paid.
I don't really see how China's economy would 'be destroyed' if they stopped receiving increasingly worthless debt chitties from The US in payment for their exports.

As soon as the Chinese people stop subsidising the American capitalist orgy, the better off they will be.

[Jimbo]

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I don't really see how China's economy would 'be destroyed' if they stopped receiving increasingly worthless debt chitties from The US in payment for their exports.


[/ QUOTE ]

You are right but for the wrong reasons. Japan is China's major trading partner followed by the EU then the USA. If you think it would't damage their economy severely you are mistaken but these days it likely would not cause a total financial collapse.

Jimbo

[The Truth]

[ QUOTE ]
[ QUOTE ]
I don't really see how China's economy would 'be destroyed' if they stopped receiving increasingly worthless debt chitties from The US in payment for their exports.


[/ QUOTE ]

You are right but for the wrong reasons. Japan is China's major trading partner followed by the EU then the USA. If you think it would't damage their economy severely you are mistaken but these days it likely would not cause a total financial collapse.

Jimbo

[/ QUOTE ]

I don't understand why they would lose the US as a trading partner. It seems to me that the amount of imports to the US would just decrease, and the US would have to find a way to pay with something other than IOUs, no?

I mean, the US wont just default on the loan. The US will "pay" it back in heavily deflated currency. China made a bad investment. They will keep exporting to the US at an amount that the US can afford.

China just made a bad invesment and it will hurt bad. I just think going they way they are now is more damaging to their economy long term than stopping.

[housenuts]

i dont' understand why china can't hedge against this with futures of cheap deflated us currency

[The Truth]

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i dont' understand why china can't hedge against this with futures of cheap deflated us currency

[/ QUOTE ]

Maybe it would be hard to get that much action? Any international law preventing them from shorting the dollar and then dumping all their dollars?

Also, somebody want to explain exactly what form china holds the US debt, bonds?

[Jimbo]

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Also, somebody want to explain exactly what form china holds the US debt, bonds?

[/ QUOTE ]

T notes, T Bills and T Bonds, like everyone else. Besides only about ten percent of our outstanding external debt is owed to China.

Jimbo