Liberty Phoenix

Hmmm, what a surprise! China is starting to worry where this borrowing binge might be taking them.

http://www.bloomberg.com/apps/news?pid=20601080&sid=a_dsDz145J_A&refer=asia

I can understand why China might be worried about their dollar denominated holdings, but I'm not sure what they are expecting us to do about it. The only way that we could guarantee the value of their holdings is to promise them that we'll borrow the money from them to make up for any lost value later on. I think this pyramid scheme is starting to look more like an Ouroboros.

When we buy goods from China, their Central Bank keeps those dollars as foreign reserves and prints new yuan to pay their exporters. This naturally has an inflationary effect on their economy. As Americans shift more towards buying cheaper goods here at home, this inflationary effect should accelerate in China. Will this trend, combined with other Chinese regulatory trends designed to combat deflation, ultimately lead to a hyperinflationary scenario? Will the Chinese sacrifice the dollar in order to fight inflation on their shores? And what will the effect be on the prices of all those cheap Walmart products that Americans have come to depend on? One author has an interesting take on it:

http://www.marketskeptics.com/2009/01/hyperinflation-will-begin-in-china...

Whether inflation is exported along with Chinese goods or it comes out of our need to monetize the debt, when they inevitably stop buying it, the next few years will no doubt be very challenging here in the U.S. and in China.