So, what would happen if China quit lending us money?

[King Coal]

I actually don't have a clue.

[LSdemocrat]

1. Well, if people stopped buying Treasury securities (US debt)

The Fed would then have to raise interest rates in order to give investors a higher return.

Higher federal interest rates would of course then lead to higher loan interest rates for US businesses and consumers (including mortgages and credit cards).

[davekriss]

29. Fork in the road

There are two tracks that can be taken (and they can be taken concurrently):

---(1) Raise interest rates, which of course slows consumption in the U.S. and induces a recession. It also bolsters the dollar as those euros and yen and yuan are exchanged for dollars to buy our higher interest bonds, making our goods look expensive to the rest of the world while their goods look cheap to us. Meaning we'd further rust out our manufacturing belt and lose market share. This dominoes to recession worldwide, not a pleasant scenario for anyone.

---(2) Print money. Let the money supply float. This is dollar-deflationary. This allows U.S. consumption to continue while "paying off" foreign holdings of U.S. debt by deflating its value. In effect, robbing the world of the money we promise them through our debt instruments. U.S. goods look cheap to the rest of the world while their goods look expensive to us. It gives manufacturing a chance to recover market share, but our assets look so cheap that many plants and factories will be snapped up by foreign manufacturers. Joe Plantworker gets to keep his job, but his paymaster switches from, say, a once paternalistic U.S. firm to something named Siemans or Bertelsman or AG.

I think this second scenario is the intended policy of the Bushit regime. Note, from 1985, before the Plaza Accord (G8 intervention in the dollar slide), we owned 3.7 times more of the rest of the world than the world owned of us; by 1992 the rest of the world owned 0.8 times more of us than we of them. Sea change.

Both solutions were followed during the Reagan-Bush years of 1981-1992, resulting in a sea change in U.S. financial health vis a vis the rest of the world, necessitating the neo-imperial wars we see today (like the example of Iraq, which was to say "woe to you if you price your oil in euros! we will rain bullets and bombs upon you!" -- petrodollars are, of course, the remaining lynch-pin of dollar hegemony).

[Raskolnik]

2. Have you ever seen Mad Max?

Kind of like that, except without as much Tina Turner.

[King Coal]

4. LOL, now that's funny.

:yourock:

[madrchsod]

3. argentina

go rent evita for a fast history lesson on what is going to happen here..opps, what is happening here.

[damntexdem]

5. Why, then the U.S. would invade China.

Oops, wait a minute. Can't do it without borrowing the money to do it -- from China.

[rkc3]

6. Now that's funny.

Yes, we'd like to borrow $40 billion so we can invade you. Not a problem. Good. See you on Thursday.

[skypilot]

7. See you on Thursday.

But then, of course, we'd have to invade on Wednesday. You know, the element of surprise and all that.

[rkc3]

12. You think, bush would show up on Friday he's so fucking stupid.

[skypilot]

13. Friday, a year from the invasion date...

...with a plastic turkey.

[Tempest]

15. China will post-date the check

Bush won't be able to invade before Monday.

[Quill Pen]

25. Chopsticks and Awe.

Sorry. Didn't have lunch today.

[madinmaryland]

9. We would have to invade China.

They would be part of the Evil Empire! They must have some sort of relationship with Al Quada.

[ooglymoogly]

8. if all the countries that soak up our debt quit doing it

it's down the crapper we go. worthless money, big time inflation, and finally a depression that will make 1929 look like the good ole days. but there is one bright note that lightens up this gloom and doom prophecy. the rich will be just fine and help for them will become so cheap they can have 30 servants instead of 3.

[King Coal]

10. Well I'll be Dillinger and you can be Pretty Boy Floyd.

Or maybe we can organize the whole labor force.

[ooglymoogly]

16. by then we will be under marshal law

to protect the people who matter, like bushco. but then i think you are right unions will be the only way to fight back.

[natrat]

21. when the oil gets scarce that will create panic

who knows when that is but rest assured this country won't prepare for it. There will be no way to grow food for 300 million people let alone distribute it.

[hfojvt]

11. They have too many dollars to do that

All the "made in China" stuff we buy, sends dollars to China. Those dollars have to go somewhere, either to buy oil from Saudi Arabia, to buy US grain or manufactures, or to buy US investments. So they are invested in the system.
Then there is the rising interest rates that someone else mentioned. Larger amounts of our budget will goto "interest on the debt" instead of social programs or combat pay. The Democrats answer to this is to raise taxes on rich people, the Republicans answer is to steal the social security trust fund or raise payroll taxes and the retirement age. They can do this subtly, the same way they eliminate the minimum wage - eliminate COLAs (Cost Of Living Adjustments) and the checks we get every month will barely buy a movie ticket.

[quaker bill]

27. There is no social security trust fund

Reagan and Bush I spent it all. All there is left is a large pile of treasury notes which will eventually need to be paid off with taxes.

So what are they proposing to do? Create "private accounts" by "off-budget" borrowing 2 trillion dollars, most likely from foriegn investors, to buy stocks and bonds for the "private accounts". If the market is strong and the interest rates on the bonds is low, it could work out.

However attracting 2 trillion dollars of foriegn investment capital into the country in the climate of a devaluing dollar will require high interest rates. High interest rates will cut into economic growth and stall the market. In short, look forward to living in Argentina.

The fundamentals are not sound and in the long haul this is always bad news.

[neverforget]

14. I wonder when the world will switch to the Euro standard?

[Yavin4]

17. If We Keep Deflating The Dollar

They will.

[Monkie]

18. iraq tried that and look what it got them - 100,000+ dead

http://news.bbc.co.uk/2/hi/middle_east/943100.stm

http://www.washingtondispatch.com/article_10361.shtml

"Saddam enters into the picture on November of 2000. Saddam makes a decision to convert 10 billion dollars to euros"

you must have forgotten the world knows the usa has WMD :P

[Monkie]

19. largest carrier deployment in US history by China coast in 2004

your fearless leader is ahead of you and fixed this in the summer!http://www.commondreams.org/views04/0715-04.htm

"Quietly and with minimal coverage in the U.S. press, the Navy announced that from mid-July through August it would hold exercises dubbed Operation Summer Pulse '04 in waters off the China coast near Taiwan.

This will be the first time in U.S. naval history that seven of our 12 carrier strike groups deploy in one place at the same time"

[sweetheart]

20. The chinese administration will be weakened..

and will probably destroy the careers of all the people involved in
"floating" against the dollar. Why?

They have like 500 billion dollars in bonds. Given the current
exchange rate, the chinese leadership has been thinking of these
billions as a stable nest egg. As they start to trade in the dollars
for thier own currency, the dollar will slip in value, and reduce
by billions the "nest egg"... like 50 billions... OUCH! Who wouldn't
fire the finance minister of a country that lost 50 billion to bad
investment management.

The chinese central bank recently made a shrill announcement to the
public media that they resent "american" pressure to devalue the
renminmbi(sp?). They know that it is signing their own political death warrant
to entertain such ideas.

Why should they give a free 50 billion to america? No way. They
plan to keep up their currency parity and make the wiley americans
pay their due bills, even if it hurts europe and america by distoring
rates... as better that the colonialists who inflicted pain on china
for centuries take the pain, than china.

China expects its investment paid in full, in local currency, and
they don't distinguish between liberal and conservative calls for
revaluation, as althought the reasoning differs quite radically behind the request to devalue, the result is the same -> the beheading and end of the political career of all chinese party
operatives involved in losing 50 billion of china's hard earned cash.

[offcenter]

22. China

Read the other day it was like $189 billion (not to pick too many nits, just noticed it on a gold/currency/doom & gloom site)

[sweetheart]

23. Yes indeed

I swear i read it in the Financial times, and now perhaps i read
"combined reserves" incorporating japan and south korea... as i was
sure the number was over 500 billions... but on googling i'm finding
the number you're mentioning as well.... however bond holdings
are not the total cash and whatnot, i'm stuck for a decent link! :-(

Whatever, the amount, the point is that the losses of a revaluation
are soo high, that the political cost will be extreme for whomever
is involved. This link says that china is expecting to lose billions
eventually. What i detected in their financial times announcement
was nothing so generous. It seems that some people are really
sweating the heat on losing the inevitable billions and the cush
export deal to boot.

http://www.kitco.com/ind/Field/dec032003.html

[offcenter]

24. And it is happening now

China, Russia and Japan all "diversifying" their holdings of reserves.
Euros up, gold up, $$$ way down. This will continue for a while.

[sweetheart]

26. Happening "now" - the pile on effect

As there is no center to the global financial community, such a
move takes a global consensus. In this regard, the movements we're
seeing today shows continuing momentum towards devaluation.

That said, the move started years ago, when bush launched his
irresponsibility in government movement. The spooky thing is that
there is no bottom to this, and i expect the global inertia towards
revaluation has been so great, that this move is only the very
beginning of a collapse that is the nightmare of every currency
strategist... even dollar bears.

The outcome of this latest poll shows that americana supports the
irresponsibility, and that the brake fluid is empty on the roller
coaster.

[quaker bill]

28. A "run" on the markets and the dollar

Remember, to profit in an up or down market, all you have to do is be out in front of the next move. Since foriegn investors control a large enough interest in the markets to control their fate, to a significant extent, they get to pick our future.

They have no confidence in Bush, and may register their vote of no confidence in ways we will find quite unfortunate.

Citizens of other countries do not get to vote in our elections. But they do have other ways to make their opinion known. They have the techniques down pat and have used them before. Krugman lays out the mechanism fairly well in his book.