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US decoupling itself from China would have an avalanche of effects, including huge inflation on most consumer goods, and outright product shortages. China is al
by havetocharge 7y ago
US decoupling itself from China would have an avalanche of effects, including huge inflation on most consumer goods, and outright product shortages. China is also a huge foreign debt holder, and if presumably no longer a buyer due to decoupling, will send US interest rates skyrocketing.
- internet_user 7y agoThe fed has unlimited control over the rates. They could literally just buy out every bond in existence.
- tunesmith 7y agoI don't see how that works. If the US Government has to sell bonds to borrow money to finance the deficit, and buyers start disappearing, they have to raise interest rates to make the bonds more attractive to the remaining buyers, don't they?
- opportune 7y agoNope because the Federal Reserve can issue new Federal Reserve notes (aka money) to the US Government to buy their bonds at any price point. As the other commenter pointed out this would cause inflation (as it increases the money supply)
- tunesmith 7y agoI see. Printing money to buy new financial assets would also cause greater wealth inequality and populism, although maybe those are seen as benefits to the current administration.
- deleted 7y ago[deleted]
- opportune 7y agoI could be wrong but I don't think buying US treasuries would directly increase wealth inequality, since the money is being used to fund the US government. If the Fed bought other more private assets off the market (which I believe it does) then yes it could increase wealth inequality
- tunesmith 7y agoPossibly, I may be confused between simply buying treasuries, and quantitative easing. Still learning!
- ethbro 7y agoTo broadly simplify: Buying treasuries = the Fed giving money to the US government Quantitative easing = the Fed giving money to banks In the case of the US, the entire game is also complicated by the fact that the US dollar has insinuated itself into the global economy. Most critically in oil markets. Because of this, there are some things the Fed can do (mostly) without the consequences other countries would face.
- gumbo 7y agoThis would increase wealth inequality because it’s mostly well-off Americans that own financial assets. Look at the wealth inequality increase since 2008. It can mostly be attributed to federal reserve QE policy.
- wrong_variable 7y agoProducts don't grow on trees. If the fed buys every USD bond in existence ( aka monetize the debt ) - it would lead to a good amount of inflation.
- imtringued 7y agoInflation isn't global, it can easily happen in economic sectors that exclude the vast majority of the population.
- drtillberg 7y agoYes, but the pressure to pay off those bonds would be deflationary, so in order to sustain the inflation next the Fed would have to do something even more extraordinary! AFAIK this policy pathway leads ultimately to bond forgivenesses (or funky bankruptcies) that eliminate deflationary pressure but may well have the unpleasant side effect of radically adjusting the fiat currency system.
- im3w1l 7y ago> Pay off those bonds I don't think that would happen. They will just borrow ever more. Which if debt increases slowly enough, is sustainable but causes inflation.
- AnthonyMouse 7y agoHow do you mean? If the Fed creates new money and buys bonds with it, the Fed can continue to hold them forever (really just until they mature) if it wants to. Then the Fed is more or less part of the government, so when the bond matures the Fed takes the bond to the treasury which gives it cash, then it gives the cash back to the treasury. It's like the bond evaporates into nothing when it matures while the Fed is holding it. If the Fed theoretically bought all the bonds then it could obviously no longer increase the money supply by buying bonds, but we're a long way from that, and even then the Fed could still create new money and give it directly to the treasury to spend in lieu of collecting taxes. Or in the utopia where buying all outstanding government debt and funding the entire federal budget out of new money still hasn't caused the desired amount of inflation, to use to enact a negative income tax.
- tenpies 7y ago> China is also a huge foreign debt holder, and if presumably no longer a buyer due to decoupling, will send US interest rates skyrocketing. Before that happens, the capital exodus demanding to liquidate their Yuan for USD would have burned through the country's USD reserves and they would be insolvent. This is quite similar to what happened in South Korea in 1997 and it took IMF intervention to stabilize the country. The PBOC could limit how much a person can sell, but this would crash their currency (e.g. Venezuela) almost instantly. As much as people want to hate on Trump and/or the US, China is in a weaker position here. Don't get me wrong, both countries suffer, but only one of them would see its financial system collapse.
- chiefalchemist 7y ago> "...but only one of them would see its financial system collapse." Unless that is an absolute certainty then and this is a game of high stakes chicken, then I would say the USA has more to lose. While China has certainly developed in the last couple decades they are still relatively used to living with less. On the other hand, Ameicans lose their minds when Facebook goes down for an hour. That is, there would be bedlam in the USA. China much less so.
- LegitShady 7y ago>Unless that is an absolute certainty then and this is a game of high stakes chicken, then I would say the USA has more to lose. Nothing is ever certain and that's not how people make decisions. What are you waiting for Chinese to use manipulated currency to buy local factories all over the world? It's already nearly too late.
- chiefalchemist 7y ago> Nothing is ever certain. That's exactly my point. I was pointing out that unless the previous comment was absolutely true (i.e., China would be wrecked and the USA would not be) then even if both fare badly the USA would __relatively__ be hurt more.
- empath75 7y agoThe us decoupling itself from China would be an unmitigated disaster for the us as China would align itself with Russia.
- assblaster 7y agoRussia is an irrelevant economic factor in the 21st century. Their export is fossil fuels, and that's about it.
- deleted 7y ago[deleted]
- fosco 7y agoIce/water will be a major export very soon. Countries will go to war over it.
- mobilefriendly 7y agoNope. Drought is usually local and water shortages are often from the breakdown of regional infrastructure. There are recently discovered truly massive water lakes in the earth's mantle. https://www.livescience.com/46292-hidden-ocean-locked-in-earth-mantle.html https://www.livescience.com/46292-hidden-ocean-locked-in-ear...
- dragonelite 7y agoNortheast passage in a couple of decades might be a big boom for Russia and China.
- thrwayxyz 7y agoRussia has the population of Nigeria and the GDP of Italy. The cold war ended a while ago. Worrying about them today makes about as much sense as worrying about Autria in 1930 because Austrohungaria used to be a world power.
- chrischen 7y ago
- nradov 7y agoChina holds only 5% of US federal government debt, down from a peak of 11%. If they stop buying it won't cause interest rates to skyrocket. The impact would be a few basis points at most.
- AstralStorm 7y agoThat is presuming private ownership effects won't be big. And they will be. China owns more corporate debt in the US than anywhere else and it is a high percentage.
- mobilefriendly 7y agoNot necessarily. If the Chinese yuan is devaluing, Chinese investors want very much to hold US dollar denominated debt.
- AstralStorm 7y agoYes, and so they would want to hold the federal debt. And also find ways to increase it. The GP post relates to China selling the debt to disentangle from USD.
- formercoder 7y agoLuckily there is massive domestic demand for US corporate debt.
- baybal2 7y ago> The impact would be a few basis points at most. After a decade of rock bottom rates, even few basis points will sound big