quadraphonics said:
...At the end of the day, all I was trying to get across is that China *must* finance the trade imbalance, or it will cease to exist.....the fact is that China just turns around and dumps it all back into the US. ...This means that, despite the trade imbalance, there is no large-scale transfer of wealth taking place from the US to China. All of the proceeds from the trade imbalance just get recycled back into America.
Currently true, but not etched in stone or a law of physics. It can change over night, with little problem for China and disaster for US. The US would need to buy more presses to print more dollars to pay it current bills. Obviously the value of each would dramatically fall. As this happens other countries would get out of dollars that are rapidly losing value and this will only accelerate the dollar's collapse. Look at the economic bomb the US has given China:
Reserves in billions of dollars held by:
China (sept05) ....769
S.Korea9(Oct05)..207.2
India (Oct05).......137.6
Japan (Oct05)......841.8
Russia (oct).........161.2
Taiwan (Oct05)....252.0*
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* One of several reasons why the mainland does really want to get Taiwan back. In addition to national pride, Taiwan being one of the worlds most efficient per capita production centers and one of largest suppliers of IC chips, etc. technology are some other reasons.
Effectively,
by borrowing for years, at an ever increasing rate, to live beyond its means, the US has built a "chain reaction" economic bomb that China can touch off any time it wishes. China does not need one thing from US and as you point out, really is currently getting essentially nothing from US now but IOUs that it returns to the US economy by financing the US debt, building this economic bomb even bigger each year.
Their recent great increase in defensive military expenditures is probably based on fear that a severely wounded, collapsing US, which still possesses a stronger military, might try to make "regime change" on the mainland, in the name of human rights or democracy etc.
China increasingly needs raw materials and food stocks. Brazil sold them 3.7 billion in 2004 and 4.8 billion this year, to date, 1.5 billion of which was soybeans and a large amount of iron ore, but I do not have the number.
Again:
China does not need the US. Why do you say it must finance the US debt?
You are also wrong to say that the trade imbalance will automatically stop if China, et al, do not finance the US debt. US government expenditures, (Baby boomers collecting Social Security, Iraq war, Military equipment, Katrina promisses, etc.) will not stop. These expenses will be payed by printing more dollars. Inflation will get out of control, further erroding the willingness of foreigners to lend to US. But the better off in US will still be drinking french wine etc. Imports will fall only slightly, but every month it will take more dollars to pay for them. The Interest bill on the US debt will skyrocket as Interest rates soar to 10 or 15 %.
Later by edit: I expect that the physics volume of imports may fall 25 or 30% but oil imports only by about 10% because people in the NE still need to heat their houses, planes need to fly, oil fired electric plants still burn oil, etc. However, the cost of the lessor volume of imports will increase by at least 30% as the dollar value falls. China and others will not just "dump their dollars", but be increasingly willing to buy oil in the ground reserves, build and buy production facilities, etc even if payingly excessive prices for them, as that way their loses on holding dollars are reduced.
