- Poor man in China produces a good
- Rich man in America buys the good
- However, the rich guy in America realizes that he doesnt' have the money to buy the good
- 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
- The American guy keeps borrowing money from the Chinese to buy Chinese goods
- Both guys are happy...
- 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..
- 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
- What makes this possible? The status of the dollar as the world's reserve currency
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: