Lisa wrote:Simplistic, probably yes but practical. How exactly will China come callingDavidD wrote: And what happens to the U.S. when China comes calling for the debt? The same that happens to anyone who owes a ton of money and has to pay it back? Not quite, right? I think your view is a bit too simplistic.
for the debt. I would be grateful if you could go through the modalities so I
could better understand.
If supply and demand was allowed to take their normal course, China's
RMB would have naturally revalued itself and relative to it US Dollar would
have devalued itself. China for purposes of 'competitiveness' manipulated
the system by artificially supporting the Dollars value and then had the
stupidity to buy the very asset they were artificially supporting!
Now they are in a bind, sell the Dollar and devalue the majority of the
assets they have worked so hard for or carry on supporting an asset which
everyone including them knows full well is not really worth its current value.
I have watched this for some 5-7 years and constantly asked myself 'how
can this carry on'. For those better informed then myself, what would have
been the effect of a free market where RMB revalued itself and Dollar
depreciated to compensate for US excesses and uncompetitiveness. I
think US rates would have risen curtailing both easy credit and the
excesses that we recently saw. Who knows probably a simplistic thought.
The buying of the dollar IS the method of artificially supporting the value of the dollar. Do you know who the biggest currency manipulator in the world is? It's not China, but the U.S. The truth is that all nations are currency manipulators, the U.S. is just a particularly bad and hypocritical one. They do it in broad daylight in the form of issuing bonds and then printing more money in order to pay off their debt, yet no one calls them out on it. For example, say you buy $1,000 of U.S. bond, and when it matures the American government just prints out $1,000 to give it to you. What it does is setting off inflation, because simply printing money devalues the money. Of course, you don't see such a heavy inflation in the U.S., precisely because China keeps buying USD to keep its demand high. I mean, think about it, the U.S. has 14 TRILLION dollars of debt, how the heck else can they manage the inflation that creates?
China is playing the part of the scapegoat right now. The western nations need somebody to blame for their economic troubles, and the undervalued RMB seems like the perfect target. It's simple(too simple) enough for the voting public to understand, and the blame resides with the "enemy" nation of China. However, let's not forget that it was only a few years ago when the RMB appreciated by a whopping 16.5%(from ~8.3:1 dolllar to ~6.7:1 dollar). Did that make any significant difference for either the Chinese or the American and western economies? No. It's beyond ludicrous and even insulting to think that the trick to a booming economy is to simply keep the currency value low.
Now, looking at China's forex reserve, what can they do with that $2.4 trillion dollars? Practically nothing. You said it's like anybody losing his life savings, but that's not quite true. We can take out our life savings and buy things with it, but can China? No, because there aren't enough takers(i.e. sellers). In essence, this is dead money, and every day it is held it is depreciated by the U.S. treasury printing more money(i.e. manipulating its currency). Perhaps one day, some currently rich nations will be desperate enough to sell something worth hundreds of billions of $$, but not now. How can China come calling for the debt? Well that's a good question, because they really can't. What they CAN do, however, is to sell this debt, which would SEVERELY depreciate the value of the dollar and not just against the RMB, but against all other currencies. In the short term, a sudden influx of $2.4 trillion dollars would set off massive inflation in the U.S.. So you see, this forex is not "savings" to China, it is a tool against the U.S. economy in particular. Of course, hurting the U.S. like that is not in China's best interest as it still depends quite a bit on exports to the U.S., but if the Americans should want a trade war, this is certainly a weapon in China's arsenal.
Here are some good reads who delve into the currency manipulation deal a bit deeper:
http://moneymorning.com/2010/04/13/washington-china/
On the U.S. corporate profits note, keep in mind that much of China's vaunted trade deficit is run by American/western companies who manufacture products in China and sell them back in the U.S./Europe.Let's assume that China's currency is 60% undervalued, as some believe. If Beijing were to immediately bring that to par, everything in this country that we import from China is going to see a price increase of at least that amount - and possibly even more. That would devastate our economy, wiping out the millions of American families that are struggling to make every dollar count right now. It would also seriously crimp - or more likely obliterate - U.S. corporate profits, igniting a new round of layoffs, plant closures and corporate bankruptcies.
The fallout wouldn't be contained within U.S. borders. Our trading partners would immediately feel the pinch, too, as we bought less and as the price increases rippled their away around the world. It would be bad news for everyone.
Secondarily, this money can be used to stave off inflation in China should such a need arises.
Typically, there's no analysis of what the Chinese population will say when they're told that effectively 50% of GDP got pissed down the drain, under the presumption that they'll juts nod and carry on. 
