Saturday, February 21, 2009


China and US Securities

Continuing from my last post, let’s take a look at this Bloomberg article, which tells us that Secretary of State Clinton begged China to continue purchasing US securities.
The two nations’ economies are intertwined and it wouldn’t be in China’s interest if the U.S. were unable to sell its government debt, Clinton said in an interview with Shanghai’s Dragon Television today. China knows it needs a healthy American economy as its biggest export market, she said, adding that the U.S. must take “drastic measures” to stimulate growth.
Yea, that’s it in a nutshell. China loans a colossal amount of money to the US government, that money then supposedly trickles down to the consumers (already choking on debt), who then supposedly spend it on more Chinese-made goods. Then, in an ideal scenario, the US government eventually pays the loan back to the Chinese government. I say “ideal” because there’s a catch, alluded to here.
The Chinese government said last week it plans to keep buying Treasuries, adding that future purchases will depend on the preservation of their value and the safety of the investment.
Oops! Yea, the Chinese might someday decide that US T-bills have no value and are not a safe investment. Indeed, the Chinese are finding that perhaps they have better things to spend their money on. Since the Chinese are not stupid, surely they see that an economic recovery in the US (or for that matter anywhere) is highly unlikely. How long will they keep beating the dead horse of US securities?

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