Wednesday, December 17, 2008

The China Debt Dump and Taiwan

The Politico (via Instapundit) reviews four really bad economic scenarios. One of those is the oft cited "debt dump":
The Chinese own more than $500 billion worth of U.S. Treasury bonds, and billons more in the debt of other U.S. entities such as those held by Freddie Mac and Fannie Mae. And a general sense of mutually assured financial destruction keeps them from wielding that debt like a weapon: if the Chinese dumped U.S. debt on the global market, their own holdings of U.S. debt would decline in value, the U.S. economy would be damaged, ultimately harming the Chinese economy by reducing American ability to buy more Chinese goods.
Yeah. It's possible, but each dollar that China sold would be worth a little less than the last. That's the problem with dumping a liquid asset (USD) for another liquid asset (Chinese Yuan, gold, whatever). It would make much more sense for them to use their large debt position to buy something really expensive, like, US recognition of China's claim to Taiwan... er... Formosa.

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