Wednesday, February 11, 2009

How Do You Say 'Daddy' in Mandarin?

The Chinese are in a tough spot. If they push too hard, the U.S. economy craters further, undermining the value of their treasuries (or the dollars they are denominated in). On the other hand, the elites in my country have hooked the government on the crack cocaine of Chinese purchases of treasuries. When your sugar daddy calls, it is hard to say no. Disgusting.

Chinese Bank Advisor Demands Guarantees on Its Treasury Bond Holdings
from naked capitalism
On the one hand, the demand by China that the US somehow guarantee its $682 billion in Treasury holding reads like a political and negotiating strategem rolled into one. It reenforces the idea that the economic crisis is the solely the fault of the corrupt, profligate West and it constitutes a demand that the US will have to deflect (at best) or trade something for...

...China seems not to recognize the peculiar position it has gotten itself in. Even if there were no worries about the US economy, even if it wasn't constrained by the need to keep buying Treasuries to hold the yuan down. China could not sell its holdings to a meaningful degree without having a serious, adverse market price impact.

But regardless of the logic, having China say bad things about the US's credibility as a debtor is not exactly what the Fed and Treasury probably want broadcast right now...

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