I’ve been thinking about this $2.5 trillion that’s going to be hitting the economy and about the effects of the resulting inflation. I don’t know a whole lot about economics and I was hoping some of you would be able to help.
I know that inflation is beneficial to debtors, and that inflation weakens a currency. I also know that a weaker domestic currency increases exports. I’ve been trying to figure out some positive consequence of the Stimulus/bailout, and it seems like it may improve our position with respect to China.
I know that a major concern recently has been the trade imbalance with China. The US has been critical of China keeping the Yuan low, and it seems like causing the dollar to lose value would make American goods more competitive. Also, it would decrease the value of the dollars China owns, which weakens the vice grip they have on our balls in that respect.
Again, I’m a pretty shaky on my economics, so I don’t know if this is right. But I remember reading that China was getting hit pretty hard in this downturn, and I was wondering if all this stimulus money was part of a strategy to make the US more competitive with China. Your thoughts?[/quote]
I would highly doubt that it is part of a strategy to make the US competitive although it may a result. We have a precarious balance that we have to hold with China. On one hand, we do want them to allow the Yuan to appreciate, on the other hand, who else is surplus-rich enough to purchase the debt that we have to issue to fund the capital injection into the economy. We can’t do it all by ourselves, even with quantatative easing measures (printing short term money to buy longer term debt). Oil money has dried up (look into what is going on in Dubai right now). Brazil’s currency took a huge hit against ours. Japan wasn’t a marginal purchaser as of lately. Sovereign wealth funds of the Asian tigers have been burnt with our banks. That pretty much leaves: China, pension funds, endowment programs, insurance companies.
We certainly wouldn’t want our endowment programs (medicare and soc security) buying the new debt only to take huge principal haircuts as inflation takes hold. Same thing with our pension funds, insurance trust funds, etc… So we pretty much have to assure China at this point that we will do whatever it takes to pull the increased liquidity out of the system before inflation takes hold.
I’m just waiting for China to say “You want us to finance this, accept some inevitable inflation that will eat at our current reserves AND this new investment, AND you want us to allow our currency to more freely float? Okay we want Taiwan AND Japan, AND we want to have military bases in Mexico and Canada just in case you get any crazy ideas.”