of the US and China economies. It wasn't the one I was looking for, but it explains it fairly well.
http://www.atimes.com/atimes/Global_Economy/FA23Dj01.htmlThe China Bubble is expanding dangerouslyAt one time, China's autarkic economy protected it from outside influence. But along with this week's figures on economic growth came another ominous big number. From once being nearly self-sufficient in oil, China is now the second biggest oil importer in the world - and is on the verge of needing massive coal imports as well. The China Bubble has expanded to a point where it will soon reach the sharp edges of infrastructural capacity and reckless over-investment to the point of over-production. That is when bubbles burst.
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Schmeidler concludes, "The single greatest force for deflation is when you have open trade between nations that have the ability to import the most efficient manufacturing expertise into a low-wage-base society, and so can produce products of the same quality as the high wage economy. The price pressure on the product allows consumers to get more for their money and they benefit. But it is disinflationary, if not deflationary."
In fact, of course, China currently is lending the US the money to buy Chinese production.
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China recycles trade surplus into US Treasury bondsAmerican companies may have forgotten what Henry Ford propounded when he first built his Model T: If you do not pay high enough wages to your workers, they can't afford to buy your product. One simple basis for that Bush boom is that China is recycling its US$100 billion-plus trade surplus with the US back into dollars, and especially into US Treasury bonds. Almost half of the US Treasury bonds are now owned in Asia. So China is financing Bush's bold economic experiment: running two or more wars simultaneously with a huge budget and trade deficit, and equally huge tax handouts for the richest Americans.
One has to question the long-term economic rationale for China of putting its long-term assets into very low-interest bonds in a currency that has already dropped recently by a third - and is going to drop even more. It certainly makes strategic sense: if push came to shove over, for example, the Taiwan Strait, all Beijing has to do is to mention the possibility of a sell order going down the wires. It would devastate the US economy more than any nuclear strike the Chinese could manage at the moment.
But far from wanting to devastate the dollar, China is more concerned to maintain its currency's parity with the dollar, even as it devalues massively against the Euro or the Yen. Indeed, without those Sino-dollars flowing back, the dollar would have tanked even more.
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Dangerously, the global economy is faced by an addictive combination of China - a developing country with many problems of social instability - and the US - which the recent IMF report hints is a rapidly undeveloping country - whose fiscal irresponsibility is compounded by a political immaturity that tends to ignore geopolitical and economic reality.
If the US economy sinks and Americans stop buying Chinese goods, then it will compound the US slump as China first stops buying US bonds that have inflated the American bubble and then moves on to selling them. On the other hand, if the Chinese economy falters and it stops recycling dollars into the US economy, then the boom stops anyway. Indeed, it seems that China increasingly will need more of that cash to pay for energy imports anyway.