Saturday, December 16, 2006

Who funds our debt when the world isn't so dependent on us in the future?


I admit to being an Electrical Engineer and in no way an economist....so my ideas of how the world works may not exactly line up with reality.

I have noticed that I sometimes do not have a good perspective on how "fast" certain things tend to take....basically because the economic systems are so much bigger than I tend to imagine. (there is a huge inertia....sort of a big flywheel effect)

So when I read this article about how this US recession would not really affect the growth and health of the European and Asian economies....it caused me to go back to one of my personal predictions that the giant and growing economies of China and India are sort of "loaning" the USA the money we need to buy their goods. I felt that they NEED us because we are the big consumers, and in order for them to become the big producers, they need consumers.

Given the imbalance of trade, they quickly accumulate wealth from us...and by buying our debt with their savings, they keep us buying more and more. (and also going more and more into debt)

Apparently the US delegation to China this month seems to have come to some agreement on both counties working to lower the imbalance, but this sounds like "saving face" talk to me.

I don't think it is a fluke that China keeps their money valued low and tied to the dollar...this way it makes their goods cheaper to us and we ultimately can NOT resist them! (and in fact are going further into debt with every purchase)

But the above article sort of indicates that our slowdown is not slowing them as much as might be normal....so it seems that they are beginning to become almost "Self-sufficient"....and by that I mean that perhaps their middle class has about built up enough wealth to support the growth of their own production.....so may be they need us less and less as things go on.

Could this be why the Chinese signaled to the world that they were going to start thinking about diversifying a higher percentage of their $1 trillion cash reserve in other currencies besides the dollar?

Now I'm not predicting a crash of total melt-down of the dollar and therefore our economy....that would make their $1 trillion dollar reserve evaporate....that's not what the Chinese want either....but perhaps this might be the start of a slow "backing away" from the dollar by the world who now looks at the dollar as being better than gold.

I worry that our country needs to fix things NOW....while we still have the ability to do something. Our debt to the world is already of record size....but our country and currency still has very good standing in the world, and we need to get our house in order before we lose that too.

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1 Comments:

Anonymous Sam said...

the bush administarion now has borrowed more money then all of they governments had done up to now since america was formed.

I think we are due another great depression...

12:05 PM EST  

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