Broad Oak: your emotional support animal

Monday, August 31, 2009

Splat

A couple of days ago I said that US debt default would splat the US far worse than its trading partners; of course, I missed the point. The real danger is rejection of US debt and the US dollar by its foreign purchasers, and both Karl Denninger and Jesse see that as an outcome of the Japanese election result.

2 comments:

Anonymous said...

Denninger is good, but so is Mish, on this they seem to disagree.

Who of them is right?

The Chinese hold billions of US debt, if they reject US debt now, then that would be a rather impressive kick in their own nuts.

Sackerson said...

The Chinese have been moving from longer-dated to shorter-dated US Treasuries for some time, which will make them less threatened by bond market turmoil because the redemption dates are closer.

They may also be taking the view that they can afford to take a hit on real returns from lending to the US, if this prolongs their advantageous trading relationship.

And it buys them time to build better trading relationships - and securer currency arrangements - with others.

I think the Chinee leadership is taking a very long strategic view, which democratic societies now seem to find very difficult to do. The consequences for the US and the UK (for example) are, I think, almost certain; it's only the timing and the path that are uncertain.