How China could wreck the US economy

[bandit]

I think people believe that "dollar reserves" can actually be spent or are an "investment" of the type us ordinary people use to make money.

Right. You can't go out and spend 2 trillion dollars just for the heck of it.

they can't. the government doesn't lack money. it's not an investment; its return on investment is far lower than real investments like infrastructure or stocks which make back their money in a few years. their only purpose is as a financial weapon.

The weapon falls into MAD category, China cannot use it without hurting itself.

the alternative is our leaders are idiots and are spending money to buy things that 1.) have low return on investment 2.) can't be spent 3.) do nothing physically.

China buys dollars so that Yuan stays at lower exchange rate. This helps China in staying competitive in its export. If China stops buying dollars, yuan appreciates leading to costlier Chinese goods and fall in exports. They are not idiots, just riding a tiger they are afraid to get off.

also, dumping all US bonds would be painful but not unmanageable, while the US will likely suffer hyperinflation and a civil war if the dollar collapses.

It is umanagebale to dump 2.6 trillion dollars, where would you dump it? what would you buy for it that gives a positive return, unless you are ready to dump it in the sea. And again if China stops buying dollars, it exports become costlier, so adios to all the booming growth. You see China has a necessity to keep buying dollars to prevent its economy from collapsing, it has no option.

the US will likely suffer hyperinflation and a civil war if the dollar collapses.[/

A ~14.5 trillion dollar economy is going to be more affected by two and a half trillion dollar deluge or a 4.5 trillion dollar economy, you decide.

 

[siegecrossbow]

Could China wreck the US economy? Yes. Will it happen? No. U.S. investments fueled China's economical growth and the two economies are entwined. Upsetting one will upset the other.

 

[gpit]

China wrecks US economy? Only human reflex to this is LOL!

US economy is wrecked by bad US citizens like predatory lenders and blood-sucking Wall streeters.

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In effect, is this hot money flowing into China in anticipation of this revaluation of the yuan? Or is it a simple case of China maintaining trade competitiveness through a weak yuan? Or is there something more to it than meets the eye? Are the Chinese acquiring the dollars with some sinister motive? In effect, has the Chinese strategy of a weak currency over the years the un-stated policy of dynamiting the American economy?

Mutually Assured Destruction (MAD)

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In a daemon’s eye, everything is evil.

Instead, this is a right description. Excerpt:

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Chinese companies make many goods for less than 25% of what they would cost to manufacture in the U.S. Making those goods 20% more expensive (because it's reasonable to suppose that without government intervention, China's currency would increase in value against the dollar by about 20%) won't make American factories competitive. The most likely outcome is that it would help other low-wage economies like Vietnam, India and Bangladesh, which make many of the same goods as China. So Walmart would still stock goods at the lowest possible price, only more of them would come from Vietnam and Bangladesh. Moreover, these other countries, and many more in Asia, keep their currencies undervalued as well. As Helmut Reisen, head of research for the Development Center at the Organisation for Economic Co-operation and Development, wrote recently in an essay, "There are more than two currencies in the world."

We've seen this movie before. From July 2005 to July 2008, under pressure from the U.S. government, Beijing allowed its currency to rise against the dollar by 21%. Despite that hefty increase, China's exports to the U.S. continued to grow mightily. Of course, once the recession hit, China's exports slowed, but not as much as those of countries that had not let their currencies rise. So even with relatively pricier goods, China did better than other exporting nations.

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In 1985 the U.S. browbeat Japan at the Plaza Accord meetings into letting the yen rise. But the subsequent 50% increase did little to make American goods more competitive. Yale University's Stephen Roach points out that since 2002, the U.S. dollar has fallen in value by 23% against all our trading partners, and yet American exports are not booming. The U.S. imports more than it exports from 90 countries around the world. Is this because of currency manipulation by those countries, or is it more likely a result of fundamental choices we have made as a country to favor consumption over investment and manufacturing?

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China Currency War: U.S. House Bill Won't Fix Problem - TIME