The Don said:
At some future point in time, if the US is trying to do something with which the Chinese are not happy, they can threaten to pull out their investments, cause the dollar to crash and turn US government bonds into junk bonds. The effect on the global economy would be profound.
Well, there are several problems with that analysis. First, for the Chinese to "pull out their investments", they would have to find buyers for their investments. With the exception of investments with put options, there would not be a decrease in the investment in the US. This may cause a decrease in
future investment in the US, but not a decrease in
current investment. Secondly, a "junk bond" is one in which the guarantor has a high probability of defaulting. While the Chinese dumping US bonds would probably lower the price, it would have no direct effect on whether US bonds are junk. Furthermore, unless Chinese investment is articficially inflating the price, other investors would snap up the bonds, reducing the price drop. And any price drop that does occur will hit China most directly, since it be taking a loss on the bonds. Finally, it is rather difficult to "quarantine" money in today's economy. If the Chinese pull out of the US, where are they going to put their money? If they invest it in another country, that country is just going to invest it in the US, and take a middleman profit.
And I find it odd that people talk of a "trade-imbalance" between the US and China, as if such a thing were possible. For instance, when you use the term, you are excluding investments in the US from the trade equation. If you were to include all the purchases made by both sides, there would be no trade imbalance.
What is more alarming is if the Chinese seek to expand their influence and proactively seek US acquiescence for some terrible policy under threat of economic armageddon.
Either way, the U.S. needs to try to close the trade gap to prevent this state of affairs coming about. [/B][/QUOTE]
