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Sunday, June 17, 2007

How will China dump the dollar?

Peter Schiff says in Friday's Market Oracle that although Alan Greenspan thinks the Chinese must continue to hold US bonds since there is no-one else to sell them to...

...the Chinese do not have to sell, they only need to stop buying and let their existing bonds mature. Then the U.S. government, not the Chinese, will be the ones forced to find new buyers for its debt.

Most of the debt that the Chinese own is short-term. Therefore all the Chinese need to do is simply not re-purchase new Treasuries when the U.S. pays them for their existing notes. Perhaps Greenspan should rent a copy of the 1981 Kris Kristofferson movie “Rollover,” where the fear that Arab countries would not rollover maturing treasuries sent gold prices soaring.

Of course, even if the Chinese decide to cash out, they will be repaid in dollars, for which they will actually have to find buyers.

[...] To expect 1.3 billion hard-working, underpaid Chinese to indefinitely subsidize 300 million wealthy, over-consuming Americans is absurd. [...] When the Chinese finally wake up the American dream will disappear.

Finding someone to accept the dollars sounds a bit easier, especially if you are prepared to be a bit generous in the exchange. If you were the Chinese, what would you do?

Following this line of argument, if there is less demand for US Treasuries, their price drops and therefore their yield (the ratio of interest to purchase price) increases, which means higher interest rates. Which will make many debtors very uncomfortable or insolvent, and which will also force consumers to cut back on discretionary spending.

Lower demand means more unemployment, I guess, and a falling dollar means imports will cost more; also, exports will be cheaper to foreigners, who can therefore afford to pay more, so rasing the cost of those items in dollars. So, slumpflation for Americans?

But if countries across the world have been inflating their money supply to keep pace with the USA, maybe they will deflate in concert, too. So, maybe simply a deflationary slump, a worldwide bust?

I look forward to reading some expert who can explain the least painful way out of this. Breaking up factories to reduce oversupply?

No wonder no-one wants to be the first to burst the balloon.

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