Monday, March 15, 2010

Why China Cannot Hurt the USA Financially Despite the Debt

Here’s an interesting article, by Paul Krugman, about China artificially keeping their currency, the renminbi, quite low.

Here’s his take on whether or not China has a stranglehold upon the USA over the foreign debt the USA owes China. (Emphasis mine.)
Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.

What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets?…

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.
So even though the USA has a large debt with China (although last I heard the USA owes more to Japan) the USA does not appear at present to be in significant financial danger from China.

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