Nov 18, 2008

China now the world's largest non-US holder of treasuries

China is now the world's largest holder of treasuries (read the Bloomeberg story). What an interesting set-up...the world's largest emerging economy saving and financing the deficit of the world's largest developed country... I think of the sequence this way:
  1. Poor man in China produces a good
  2. Rich man in America buys the good
  3. However, the rich guy in America realizes that he doesnt' have the money to buy the good
  4. The poor man in China takes money from the rich American guy and lends it back to him to be able to buy more Chinese goods
  5. The American guy keeps borrowing money from the Chinese to buy Chinese goods
  6. Both guys are happy...
  7. But...the American guy is getting more and more indebted to the Chinese guy.. the Chinese guy ends up owning more and more of American assets..
  8. Motivation: the American guy wants to buy more stuff and he doesnt care about saving since the government can issue more debt; the Chinese guy is poor and he must hoard assets/savings to protect himself from future crisis
  9. What makes this possible? The status of the dollar as the world's reserve currency

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