Nov 07 2011

Excuse me, China… could you lend us another billion? Understanding the imbalance of trade between China and the United States

The $1.4 Trillion Question – James Fallows – the Atlantic

American consumers are a curious bunch. Up until 2007, the average savings rate in the United States fell as low as 1%, and during brief period was actually negative. What does negative savings actually mean? It means that Americans consume more than they actually produce.On the micro level, the only way to consume beyond ones income is to borrow from someone else to pay for the additional consumption. In other words, savings must be negative for one to consume beyond his or her income. The US is a nation of borrowers, but from whom do we borrow? China, for one…

China is a nation of “savers”, where national savings averages 50% of income. What exactly does this mean? Well, just the opposite what negative savings means; rather than consuming more than it produces, the Chinese consume only about half of what it produces. Here’s how James Fallows, a Shanghai-based journalist, explains the China/US dilemma:

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.
What happens to the rest of China’s output? Naturally, it’s shipped overseas for Americans and others in the West to consume. The irony is that the consumption of China’s products has been kept affordable and cheap thanks to the actions the Chinese government has taken to suppress the value of the RMB, thus keeping its products cheap and attractive to American consumers.

When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.

When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England).

Clearly, a strong dollar is good for America in many ways. The dollar’s strength in the last decade can be credited partially to the Chinese, who have been buying dollar denominated assets in record numbers over the last seven years.

By 1996, China amassed its first $100 billion in foreign assets, mainly held in U.S. dollars. (China considers these holdings a state secret, so all numbers come from analyses by outside experts.) By 2001, that sum doubled to about $200 billion… Since then, it has increased more than sixfold, by well over a trillion dollars, and China’s foreign reserves are now the largest in the world.

China’s purchase of American assets keeps demand for dollars on foreign exchange markets strong, thus the value of the dollar high relative to other currencies, allowing American firms and consumers the benefits of a strong dollars described above.
A nation’s balance of payments consists of the current account, which measures the difference between a country’s expenditures on imports and its income from exports (In 2008 China had a $232 billion current account surplus with the US, meaning the US bought more Chinese goods than China bought of American goods), and the capital account, which measures the difference between the inflows of foreign money for the purchase of real and financial assets at home and the outflows of currency for the purchase of foreign assets abroad. In the financial account, China maintains a deficit (meaning China holds more American financial and real assets than America does of China’s), to off-set its current account surplus.The two accounts together, by definition, balance out… usually. Any deficit in the China’s capital account that does not cover the surplus in its current account can be held as foreign exchange reserves by the People’s Bank of China. The PBOC, however, prefers not to hold excess dollars in reserve, as the dollar’s value is continually eroded by inflation and depreciation; therefore it invests the hundreds of billions of excess dollars it receives from Americans’ purchase of Chinese goods back into the American economy, buying up American assets, with the aim of earning interest on these assets that exceed the inflation rates.

The “assets” the Chinese are using their large influx of dollars to buy are primarily US government bonds. The government issues these bonds to finance its budget deficits, and the Chinese are happy to buy these bonds for a couple of reasons: They are secure investments, meaning that unless the US government collapses, the interest on US bonds is guaranteed income for China. That’s one reason; but the primary reason is that the purchase of these bonds puts US dollars that were originally spent by American consumers on Chinese imports right back into the hands of American consumers (via government spending or tax rebates), so they can continue buying more Chinese imports.

The Chinese demand for dollar denominated financial assets, including government bonds, corporate stocks and bonds, and real assets like real estate, factories, buildings and so on, has resulted in a long period of a strong dollar. If the Chinese ever decided to stem the flow of dollars into American assets, the dollar’s value would plummet to record lows, leading to high inflation and eventually a balancing of America’s enormous current account deficit with China and the rest of the world.

However, a falling dollar is the last thing China wants to see happen, for two reasons: One, it would make Chinese imports more expensive thus less attractive to American households, thus harming Chinese manufacturers and slowing growth in China. Two, US dollars are an asset to China. Its $1.4 billion of US debt would evaporate if the dollar took a major plunge. To China, this would represent a loss of national wealth; in effect all that “savings” that makes China so unique would disappear as the dollar dived relative to the RMB. For these reasons, it seems likely that China will continue to be a willing buyer of America’s debt, thus the financier of Americans’ insanely high consumptive lifestyle.

Discussion Questions:
  1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
  2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
  3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
  4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

152 responses so far

152 Responses to “Excuse me, China… could you lend us another billion? Understanding the imbalance of trade between China and the United States”

  1. Mankaon 19 Nov 2008 at 5:32 am

    Keeping in mind that these days American dollar as well as economy is slumping, it can be said that this is mainly caused by American consumers' tendency to consume more than what is actually produced. This has been caused by a trend followed by everyone, which is by borrowing money from everywhere to satisfy unlimited wants, even if that means exceeding expenditure than what is earned.

    China, in turn is very conscious of US dollar's power, i.e. does not want it to depreciate. This is so because if that happens, which it has, then, China's exports will become more expensive thus slowing the growth of China. Secondly, its $1.4 billion of US debt would evaporate if the dollar depreciates.

    For the past decade the power of US dollars has been maintained by China, it can be said, because China has World's largest foreign reserves worth of over trillion US $, which has kept the demand for dollar pretty high.

    However, as the value of dollar slouches, it can be said that, it will lead to higher exports for US, and lower imports, ie, China wont be able to import as much as it used to thus affecting its economic growth, which will in turn affect US's growth as well because now China is not able to buy as much foreign reserves as it used to.

  2. Elisabeth Spielbichlon 21 Nov 2008 at 5:20 am

    Manka that is a very good response! You basically said what I wanted to say! =]

    Anyways, isn't the government in China intentionally intervening in the market to lower the value of the Chinese currency – in other words devaluing? I mean this can be seen as a form of protectionism, but I am not really sure why a government would want to revalue their currency. Why would they?

  3. Mankaon 21 Nov 2008 at 8:50 pm

    Yes, Elisabeth, you are right, the government, in China is intentionally keeping the value of RMB low, ie, devaluating. This can be seen as a form of protectionism because keeping the value of your currency low means that it will appear more appealing to other nations who want to trade, because the currency is weak. and weak currencies interest nations who want to import goods. Basically, if chinese currency is weak, this will lead to greater exports of China than when the currency is not weak. Also, at this point of time, when there is a global recession occuring, WTO is trying to persuade China to stop keeping the RMB's value low.

    In addition to that, you can say, in the beginning of this year, the reason why USA did not fully go into recession was that the value of dollar decreased, so this attracted other consumers who would buy US goods. This actually increased the growth of US because the exports increased.

  4. Theresaon 27 Oct 2009 at 1:38 am

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    As writen above, China’s purchase of American assets keeps demand for dollars on foreign exchange markets strong and the value of the dollar high relative to the other currencies. If they would now dump their dollar holdings the value of the dollar would drop drasticly and american firms and consumers suffer from a weaker dollar.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is unlikely as China will be so smart to put it in US government bonds, as their interest rates represent a very secure revenue for them. The US uses these bonds to finance its budget deficits.

    Additionally more of Chinese products will be bought as the American consumers (who were the once that bought chinese products in the first place) receive their money back and can spend them again. This is very profitable for the chinese economy.

    China would also not want a falling dollar since then Chinese imports are more expensive to american consumers which would make their economy suffer.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    The households are buying chinas cheap products and are paying the cheap prices, instead of buying american products.

    They are suffering from this arangement as less and less from domestic firms is bought and therefore the domestic economy suffers and more of their tax will be used to bring it back forward and ensure a good life to those who have lost their jobs due to the recession.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    No since their debt grows and grows and grows when they are selling it.

  5. christianoon 27 Oct 2009 at 5:24 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    This would cause the value of the dollar to decrease drastically which would further harm American industries who have to pay a higher price for resources from abroad and American consumers who have to pay a higher price for foreign imports.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The US is happy because the fact that China keeps buying American assets keeps demand for the dollar high which also keeps the price stable. Furthermore, the US can use Chinese money to finance its current account deficit.

    China is happy about a strong dollar because that makes its exports relativley cheap compared to American products and because it has 1.4 trillion of US debt in dollars which is a secure investment for China. Thus, it is very unlikely that China would dump its dollar holdings, since this would erode the value of its 1.4 trillion dollars of US debt.

  6. Marenon 28 Oct 2009 at 1:30 am

    1. The value of the dollar would fall drastically, because China has so many "dollar holdings" that demand for the dollar is high. If they would dump them, demand for the dollar would decrease, which would cause inflation.

    2. China is very unlikely to do this because it would make Chinese imports to the US more expensive and also because China holds many assets in US dollars and the value of it would be lost causing a loss of national wealth.

    China benefits from a strong dollar because imports from China are cheap and thus US citizens consume more of them. It also assures China their assets and with interest rates even increase China's wealth.

    The US benefits due to the low prices of the importet goods from China.

    3. As said before, the US consumer benefits through the low prices. But on the other hand there are not enough US made goods consumed anymore which could cause firms going out of business and thus causing unemployment in the US.

    4. No because maybe at some the Chinese for example want their money back because it represent their countries wealth.

  7. Laura Perezon 28 Oct 2009 at 4:27 am

    If China would stop investing in the US then the US dollar would fall drastically, which in turn would lead to an immense increase in inflation in the United States.

    However, this is not in China's best interest. China exports an enormous amount of products. A weakened dollar would make Chinese imports much more expensive and therefore unattractive to the American consumer. Another way China would be affected is that they would lose a large portion of money that it has invested in government bonds and lose their guaranteed interest.

    Americans benefit because the Chinese assure the dollar will stay strong, and a strong dollar means they have the power to purchase more with the same amount of money. Prices of goods and services are lower. The value of stock markets, real estate, other American assets goes up. Interest rates go down and the burden of taxes is taken off American shoulders since foreign powers help pay for it.

    It is hard to think of something lasting forever without collapsing sometime like we have seen in the past. The business cycle illustrates just this; periodic fluctuations showing a boom, recession, trough and recovery. What adds on to a collapse taking place in the future is the scale to which the figures of money have grown. America's debt continues to rise dramatically while countries continue to purchase bonds. What makes these bonds so attractive is how secure they are and how likely countries are to get interest back. But if national debt continues to rise countries will start to lose confidence in the American economy and there will come a point where America's government bonds will not be so appealing and safe to invest in.

  8. Emil Mawadon 28 Oct 2009 at 5:02 am

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If the Chinese decide to "dump" their dollar holdings in order to change the currency of their savings, the value of appreciation of the dollar would plummet down drastically, causing it to depreciate at a very fast rate. Following that, higher inflation would come along, causing firms to experience the rise in their costs of production, and consumers to face high prices for their goods and services. American assets would become far too cheap, making them easy to obtain by other countries and the low price of exports wouldn't be enough for the Americans to cover their foreign debt.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China needs America to have a stable dollar. first of all, if American dollars remain relatively high priced, that leaves Chinese exports affordable and attractive for the American consumers. Another point is the loss of Chinese largest American asset, its debt. Debt which is translated into government bonds, being a sure return of money, and also part of the Chinese reserve; if the Chinese were to get rid of their dollar savings, they would dissolve one of its largest share of national reserves

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    Since China finances the budget, American consumers don't receive a massive tax increase, leaving them more amounts of money to spend in Chinese imports. The only problem however is that China holds most of the government bonds which are meant to be for the American people, given that it's their tax money and consumption that give value to the said bonds. Essentially China owns more American assets than Americans themselves.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    Personally, I think Americans could prolong the vicious circle of feeding China with American debt in exchange of cheap Chinese imports, however this only means that the debt is growing each and every year. At some point one of the parties has to give in and collect the money because it is after all DEBT, not real capital. When that point in time comes, for example the Chinese undergo a situation where they need American goods, they'll find themselves in a position where they only have government bonds, a non liquid form of asset. When the American government is forced to supply the money equivalent of those bonds, they'll have to get the money out of somewhere, the banks. The crowding out effect will occur, increasing interest rates for all American consumers and producers, and the costs of production will go up. Eventually the results could be devastating within the American economy.

  9. Jonathan Ron 28 Oct 2009 at 6:33 am

    Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China were to suddenly make a landmark move and decide to maintain its foreign reserves in another currency, this would cause the value of the US dollar to nosedive. It is all about simple demand and supply; the "value" of the US dollar in relation to other currencies is entirely dependent on the supply (i.e. those willing to trade US dollars for another currency) and demand (those willing to trade other currencies for US dollars), with the current exchange rate at the equilibrium of S and D. If China were to change the currency of their official reserves, the supply in US dollars would increase many times over, and its value would quickly decrease.

    How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    Because further borrowing from China allows the US government to avoid any further tax increases, this does not place any additional burden on US households and therefore allows them to continue, unabated, to consume at their current level. Furthermore, it allows China to keep the value of the RMB at an artificially low level, meaning US households can continue to consume affordable goods and services from China.

    However, this arrangement can also prevent domestic (US) industries from competing on a level playing field with their Chinese counterparts, as the low value of the RMB in relation to the dollar makes Chinese goods more affordable and therefore attractive and American goods less so. Also, further borrowing from China increases the US government's future costs with regard to the interest they must pay, and some may have misgivings about the fact that the Chinese own so much US government debt and assets.

  10. Alex Hanon 28 Oct 2009 at 7:51 am

    1) Enormous demand for Dollars in China has kept the Dollar strong. Hence if China turned to another currency, this would result in a decline the value of the dollar as demand has decreased.

    2) China would not want to see the dollar depreciating because this makes Chinese goods more expensive and thus less attractive. This would be harmful to the Chinese manufacturing industry and the economy in general due to less exports.

    4) This is how I would explain it:

    a) China started out as the "factory" meaning exports rose significantly (while imports rose at a smaller rate)

    b) China therefore had a current account surplus

    c) It would be unwise to simply keep these surpluses as they may decrease in value any time.

    d) China offsets the surplus with a capital accound deficit.

    e) as a result China buys assets from other countries. Mainly the US.

    So in effect, being the factory lead to becoming the buyer. I think now they are both.

    5)I do not have a good answer to this question because I am not so knowledgable of the matter but this has always been an intriguing question. USA has so much dept. In micro levels, hypothetically speaking, if I had so much dept to a person that I couldn't even repay it. Then that person would have the right to make me work for him: clean his dishes, clean is car, his house, cook him meals…. so that I'd repay the dept SOMEHOW.

    But in the macro-economy, it is fascinating how ignorant people seem to be toward dept. Considering the micro situation I talked about, wouldn't China have the right to… exploit the US, of somehow demand a repayment of the dept? Before we ask whether US can survive with this selling of dept, I want to know, WILL the US EVER have to pay it back? One thought is that if the US were to be cornered by China, this may trigger international conflicts. Is this the reason for the ignorance toward dept?

  11. Alex Son 29 Oct 2009 at 7:13 pm

    Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China decided to change the currency of its foreign reserves, the market would be flooded with the trillions of dollars that China has amassed over the last decades. As stated in nearly all of the responses above, it is a matter of demand and supply. Should there be a sudden, huge increase in the supply of dollars, the price, or worth of the dollar, would consequently decrease.

    Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    Rather than keeping the US dollars it has acquired in banks, China reinvests this money into American government bonds, stocks and assets. The yields that China receive from these bonds, and the returns from the stocks it invests in, are positive for the Chinese economy. Therefore China is actually benefiting from its ability to hold so many US dollars in its reserves. Also the US is gaining from China's actions. Because American government bonds are being bought up by the Chinese, the US is able to maintain, and in some cases even lower, taxes. This takes pressure of American citizens, and as long as this status quo is maintained, both nations will be content.

  12. Max S.on 29 Oct 2009 at 8:20 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the US dollar would drop tremendously. This is because China has kept the US dollar strong in order to allow the American's to have good purchasing power to buy Chinese goods. Once the reserves are gone, there is no more money to sustain this strength, meaning that there will be a huge mess. The demand for American dollar will drop enourmously.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China is unlikely to do this because they do not want to break the status quo. China's main trading partner is the US. By keeping the dollar strong makes Americans buy Chinese goods such as poisoned milk and toxic toys. By breaking the status quo, there would be no more demand for Chinese products. The risk of this is that China ends up having a current account deficit. They will spend more on imports than they make on exports.

    Also, the Chinese are making money out of their little deal that they have with America. By reinvesting their savings into bonds, they are assured of constant returns, and an increase in their "national wealth".

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    They benefit of increased purchasing power, lower interest rates, lower taxes, just to name a few. They benefit with increased living quality and their ability to have negative saving rates.

    I cannot think of anything that will make American's suffer.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I think it is possible. Well, to some extent. In any case, one day there will be a reason for this to break down. This will lead to the worst economic crisis there will be… ever.

    American's are in huge debt to China. They are losing enourmous amounts of money, not only through the trading that is occuring, but also through the bonds. When the Chinese government reinvests into US Bonds, they are being assured returns, no matter what. Even if the American government needs to borrow money to pay these bonds back. The Americans are driving themselves into even further debt everyday.

    The only danger in my opinion is if America defaults on its debt. This would cause not only huge political chaos, but the economy would go crazy. All debt would be gone, and China, would find itself having lost enourmous amounts of money, not being able to pay back for its glittering cities that it is able to build through their domination in current accounts. This would cause enourmous economic problems in China, meaning that they would have to invest carefully, stop investing in some parts of their economy, such as providing subsidies for firms. Firms would stop investing into technology or captial, meaning that the costs of production have immensly increased, leading to a decrease in production and an increase in prices. This would not only affect China, but it would ripple throughout the world and America for the most part, because American's would find themselves having to buy American goods, being a lot more expensive. This would cause less consumption, and create an enourmous recession, due to a lack of demand for products.

  13. Lailaon 30 Oct 2009 at 4:05 am

    China is doing America a great favor and vice versa. There seems to be a cycle where America buys products from China and China in return buys assets from America, injecting the money right back into the American economy. Thus, America is very dependent on China's cheap labor and cheap currency. It also make life in the U.S. easier , beneficial, and more affordable because by investing the surplus dollars in government bonds, America is capable to avoid any tax increase to afford government spending and to finance its current account deficit, therefore, lifting the households burden so that they can consume further and with confidence. Also, China's investments will keep the demand for the dollar high making prices stable. However, China is also dependent on America because if they buy American assets as a form of investment and appreciating the dollar consequently depreciating the RMB so that China maintains its status as a strong exporting country. If china would stop investing in American assets the U.S. dollar would not only depreciate but inflation in America would increase drastically; it would affect the American industries, because as the dollar depreciates so does their purchasing power against China which would cause an appreciation of the RMB making their resources more expensive to other foreign nations. This would not be beneficial to China.

  14. Laura Nanetteon 30 Oct 2009 at 5:02 am

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If the Chinese dump all their dollar holdings on to the market the value of the dollar will drop greatly. This is because the Chinese have kept the dollar so strong by keeping it, and dumping would ruin the USA's economy. The endresult will be inflation.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The Chinese would not dump all the dollar holdings, because it would have a negative effect on their own economy. As China holds the US dollar holdings, and keeps the value of the dollar up, the prices in China seem affordable for foreign countries. The US can afford imports from China, and therefore China profits from keeping the dollar up. If the holdings were dumped on the market, inflation would result in less imports from China.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    China's financing of the US government's budget deficit benefits the American households, as interest rates and taxes have become lower. Since the prices stay low, Americans can afford more products from China, and therefore keep Chinese exports up.One negative effect of this might be that more and more Chinese products are bought, and less American products are bought and produced. US industries will struggle keeping up with the prices and products from China, and many will run out of business.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I personally do not know if America can continue to finance their budget defictis by continuing to sale debts to foreigners. This is because America has such great debts, that it is already questionable if they will even be able to pay back in the future, or if they will just have to "give up". With these large debts, countries will request their money back at some point, either for personal needs, or because they do not want to continue to finance America. I think it is possible for America to continue selling their debts to foreigners for a certain time frame, however not forever. At some point they will need to take it into their own hands, and slowly pay back their debts.

  15. Virginiaon 01 Nov 2009 at 8:50 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China would dump all their dollars onto the market, there would be a lot of changes in the currency for the American consumer and others around the world. Therefore, if this would happen the dollar would drop. If this happens then the price of goods such as fuel, food and manufacturing goods would go up, which is bad for the American consumer. Also, the value of the American assets would go down, and the interest rates would go up. Due to this, it could happen that, the tax would have to be increased so that American can cover the debt. However, there is one benefit of dumping the dollars into the market, the trade would increase and more foreigners would come, creating more jobs since the prices have gone down.

    (I remember about 2 Christmas's ago, the dollar was almost 1:1 with the Swiss franc, and there were commercials all over the place with cheap flights and the comparison of different goods if one travels to the US.)

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is very unlikely for China to do this, because their number one foreign currency is the USD. China will always continue to buy government bonds with their extra dollars, because it gives them a "secure investment", since the interest rates on these bonds will increase over time. But the number one reason for buying those bonds is that it China indirectly gives money back to the American consumer, and therefore they can continue buying Chinese goods. Also, China would not want a dropping dollar because it would make Chinese products more expensive and therefore less consumption of the goods. And the other reason is that the USD is the asset of China.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    America mostly only benefits, because it keeps the prices of goods fairly low and Americans can afford more, for example vacation. Also, the value of the American assets goes up and interest rates go down. This is good for the American citizen because there are more possibilities for mortgage loans, etc. Another positive aspect is that taxing will not rise, because China is solving the problem with the American debt. The only negative aspect is that American goods are more expensive, thus there is not a lot of trade.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    Yes, I think that American can continue this process. The reason for this is that China will always be closely related to America, because in the past (up until now) China has had the USD as one of the main foreign currencies. Also, there would be only negative aspects for China; therefore America will not lose China. Also, since the USD is the main currency (example oil) in the world, they will always have the chance for foreign help to clear up their problems.

  16. Bastien Vogton 02 Nov 2009 at 4:10 am

    It is not probable because their interest rates are very desirable, they represent revenue for them. Also there will be an increase in the demand for Chinese goods (American imports) because the American firms and households are receiving more income, sponsored by China, which benefits the Chinese economy.

    China is not interested in the depreciation of the USD since it would mean that Chinese imports are more expensive to American consumers, this would decrease the amount of exports from China to America, the main importer of Chinese goods. Furthermore it would decrease the trade surplus which China has with America.

  17. Thibault dkon 18 Nov 2009 at 3:25 am

    1. If china would do this, the currency market would be flooded with dollars. This means that the supply of them would be very high, while the demand would be low. This would result in a huge depreciation of the dollar.

    2. China will most likely not do this, as this would result in the US debt towards China to almost disappear. Of course, it would still be the same amount of dollars, but the value for the dollar will be lower, making it cheaper for the US to pay this debt. At the same time, if the dollar would depreciate, Chinese goods will become more expensive for Americans. This would lead to a decrease in import of Chinese goods, which China will not risk.

    3. As China invest their dollars in government bonds, the government will be able to make tax cuts, provide subsidies, or simply put this money back in the hands of Americans through government spending. However, as this happens, the national debt keeps increasing. By reinvesting these dollars, the value of the dollar relative to the RMB will stay strong. This means that domestic firms will have a harder time competing on a global level as Chinese goods are less expensive.

    4. While one can think that America will not be able to continue to finance its deficits by selling its debt to foreigners, I believe it is possible. A huge debt might cause countries to not trust America as much as they have no insurance the US will be able to pay this back. However, due to the need of exports, China will keep supporting the US in keeping the dollar strong. If they would stop buying American debt, then the value of the dollar will go down, the debt will be paid back more easily, and more goods from the US will be sold. While this seems beneficial for the US, it will keep buying goods from China as long as China keeps the dollar strong by buying American debt.

  18. Axelon 16 Apr 2010 at 4:30 am

    Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    1. this would result in a massive depreciation of the dollar.

    2. china is unlikely to do this because then the Chinese goods would be very much more expensive in comparison to the dollar now, and fewer Americans would buy Chinese goods.

    3. the Americans benefit because now they con consume beyond how much they produce and live better off, but they suffer because chinas goods are now cheaper and then the foreign competition is a lot harder.

    4. America can continue to borrow until there are no more countries that want to lend out money to them. I believe that someday america will be screwed and they will be forced to repay their debts… or until inflation rises out of control and they pay off their debts very cheaply.

  19. Bjorn Kon 18 Apr 2010 at 9:30 pm

    If China decided to "dump" its dollar reserve, the US would be in massive trouble. The Chinese are financing the US debt by buying US government bonds and investing in the American market because China has a trade surplus. The US buys many Chinese goods because of China's comparative advantage, but also because China keeps the RMB weak. The Americans buy Chinese goods in US dollars, so the Chinese are stuck with billions of US dollars. Instead of just sticking the money under a matress, the Chinese invest in the American economy. Although it seems as if China has the upper hand, it is beneficial for both China and the US to continue trading with each other.

  20. Bjorn and Mikeon 19 Apr 2010 at 6:15 pm

    - A deficit allows for more consumption – consumption beyond domestic possibilities

    – Theoretically, while China is doing well, they could do better than they are now if they had a deficit

    – A weak dollar is bad for the U.S – they export more, but other imports more expensive (less consumption)

    – China keeps currency artificially low – increases demand for Chinese exports.

    – They purchase a lot of American securities – keeps dollar strong, and thus RMB weak

    – Chinese spending in US, puts money back in American's hands – this again increases demand for Chinese exports

    – The recession has a bad effect on China, since the dollar has become weaker – this makes Chinese goods more expensive

    It remains ambiguous whether China should consume more, or is increasing welfare more due to the larger demand for their exports

  21. Trevor.echl.f09on 01 Dec 2010 at 10:20 am

    1. The value of the U.S. dollar would drop very sharply. The currency would lose quite a lot of its worth. This would lead to incredible inflation and suddenly foreign goods would be much more expensive. Wages probably would not be able to increase with this inflation which would very much hurt consumers. The one positive aspect of this is that American goods would suddenly become much more attractive to foreign consumers! With the cheapness of the dollar, it wouldn’t be much of a payment to have to handle.

    2. There are two main reasons that China would not take this route. One, this move would greatly appreciate Chinese currency and depreciate American currency. Suddenly, Chinese and American consumers would be looking more longingly at American-made goods to purchase and this would hurt China. Also, the debt that China owns of the U.S. is a very great value. This asset would immediately disappear if they dumped the U.S.

    3. This allows the deficits that American consumers run up (by buying more Chinese goods than they are producing themselves). It almost validates this spendy behavior by the Americans. With the deficits financed, it encourages Americans to continue spending. What do they buy? More Chinese goods! They suffer from this arrangement because the Chinese now have complete control over the funding for the deficit and the cause of the deficit, meaning that if they decide to drop the U.S. consumers will be hit hard and unable to afford these goods anymore.

    4. No, because eventually there will be some conflict that involves the foreign nation in which a loss of economic sovereignty will be a major disadvantage. Oh, wait, what? There’s one already and it’s called China’s willingness to always back up North Korea even when the U.S. is ready to go to war with South Korea? Yes, that presents a problem and will continue to present a problem if the U.S. wants to remain a sovereign in their foreign affairs as well. China will soon be able to control us like a puppet master.

    Trevor Tezel

  22. Trevor.echl.f09on 01 Dec 2010 at 10:30 am

    Bjorn and Mike,

    You guys bring up a good point which I think needs to be touched on. That’s the fact that the Chinese intentionally devalue their currency which makes their goods more attractive to foreign consumers. With the relative cheapness of the Chinese currency, it has the same effect on goods and services. This is a complaint which has been brought up by many nations to the WTO in hopes that some restrictions could be put in place on the country (or better yet China could be cajoled into adopting new policies). It makes it unfair for American businesses which are desperately trying to compete with their counterparts in Asia. If China could at least correct this inequity, we might see a little bit more fairness in trade.

    Trevor Tezel

  23. sara.echl.f09on 05 Dec 2010 at 12:35 am

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    As writen above, China’s purchase of American assets keeps demand for dollars on foreign exchange markets strong and the value of the dollar high relative to the other currencies. If they would now dump their dollar holdings the value of the dollar would drop drasticly and american firms and consumers suffer from a weaker dollar.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is unlikely as China will be so smart to put it in US government bonds, as their interest rates represent a very secure revenue for them. The US uses these bonds to finance its budget deficits.

    Additionally more of Chinese products will be bought as the American consumers (who were the once that bought chinese products in the first place) receive their money back and can spend them again. This is very profitable for the chinese economy.

    China would also not want a falling dollar since then Chinese imports are more expensive to american consumers which would make their economy suffer.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    As said before, the US consumer benefits through the low prices. But on the other hand there are not enough US made goods consumed anymore which could cause firms going out of business and thus causing unemployment in the US.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    Personally, I think Americans could prolong the vicious circle of feeding China with American debt in exchange of cheap Chinese imports, however this only means that the debt is growing each and every year. At some point one of the parties has to give in and collect the money because it is after all DEBT, not real capital. When that point in time comes, for example the Chinese undergo a situation where they need American goods, they’ll find themselves in a position where they only have government bonds, a non liquid form of asset. When the American government is forced to supply the money equivalent of those bonds, they’ll have to get the money out of somewhere, the banks. The crowding out effect will occur, increasing interest rates for all American consumers and producers, and the costs of production will go up. Eventually the results could be devastating within the American economy.

  24. Mattea.echl.f09on 05 Dec 2010 at 6:12 am

    1. The value of the dollar would drop sharply. Right now, China's purchase of American assets keeps the demand for the dollar strong, making the value high compared to other currencies. If China were to drop its holdings, the dollar would become much weaker. Inflation would likely follow, prices would rise, and the value of American assets would go down.

    2. When China puts its money in US assets, it is financing the US government. Through spending and tax cuts, this money ends up in the hands of American consumers, who are then likely to go and buy Chinese goods.

    3. They benefit because the Chinese are financing the government spending and tax cuts that help the consumer. They suffer because the continued financing of their high spending is dependent on the Chinese continuing to profit from the arrangement.

    4. Already in America, people are protesting the government spending that they feel leaves them beholden to foreign interests. If all spending is eventually financed by other governments, the US will start to lose a bit of sovereignty and become dependent on these foreign governments. It's unlikely that the process will continue.

  25. Mattea.echl.f09on 05 Dec 2010 at 6:16 am

    Sara,

    You mentioned that US consumers may suffer from the Chinese buying of American debt because, with the strong dollar, American goods will seem more expensive and firms will lose profit. This is actually one of the big controversies in international economics. The Federal Reserve is using a policy, called quantitative easing, to try to devalue the currency and make American goods cheaper. Many object to this policy and view it as dangerous; however, the US has often accused China of artificially devaluing its own currency to help exports. It seems like the two countries' interests don't align exactly in this case.

  26. chamonix.echl.f09on 07 Dec 2010 at 4:06 am

    1. If China decided to change its reserves to another country, then the value of the dollar would drop, and unemployment would be at an all-time high in the United States. This would severely harm American producers and consumers. Wages for Americans would fall.

    2. If China dumped its reserves, then international consumers would find American goods much more attractive than Chinese goods. Even the Chinese would stop buying Chinese products and would change to American goods. This would harm the Chinese economy as it would see a sharp drop in demand.

    3. American households benefit from China's financing of the deficit because it means that they are not responsible for paying, in taxes, for the overspending of the government. This leaves taxes low, which increases disposable income. However, American households are hurt because domestic demand drops, which means that unemployment rises. Also, the United States is never fully secure as the Chinese are in control of their deficit.

    4. The United States can go on for a while with its spending. However, eventually there will be a breaking point which will stop the process. Nations like China will become angry. The post said that the Chinese could afford to live much better. People, as economic creatures, want to improve the standards in which they live. Therefore, it is likely that the Chinese will soon demand that the payments to the United States are, at the very least, reduced.

    Chamonix

  27. chamonix.echl.f09on 07 Dec 2010 at 4:10 am

    Trevor,

    I think that you're right about the issues in the Koreas. The United States and China are unwilling to directly harm each other–economically, politically, or militarily–as both rely so heavily on Chinese exports to America. However (funny how this whole thing seems to have happened fifty years ago) this agression can be taken out in other places, such as the Koreas. I think that if full-out conflict does break out in the Koreas, it will be interesting to see how the relationship between the US and China changes. It's clear, though, that it might be economically messy.

    Thanks for the great post,

    Chamonix

  28. Ralph.echl.f09on 07 Dec 2010 at 9:01 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the Dollar would decrease enormously as it is no longer attractive.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China would not do this as it would make Chinese imports more expensive thus less attractive to American households, thus harming Chinese manufacturers and slowing growth in China. As US dollars are an asset to China. Its $1.4 billion of US debt would evaporate if the dollar took a major plunge. This would cause a fair amount of Chinese savings to go to waste and its National wealth would decrease by vast amounts.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    They benefit as the money is pumped back into their economy to benefit both them as nation by lowering taxes which in turn could lead to more consumer spending. As well as help China gain money when they invest into government bonds. However this means America is in a very vulnerable position as China has a fair amount of control on their deficit.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    Its evident that the government is making attempts to reduce costs, which the Obama administration is trying to enforce. However the problem is that most people don't understand what this means and why it is happening. I do think that it will have to stop, as countries will not constantly want to compensate for somebody's poor finance. America has become to dependent on foreign investments in the last couple of years, and I believe it will have to stop to avoid any future problems.

  29. daniel.echl.f09on 07 Dec 2010 at 9:49 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the dollar would plummet severely against all other currencies as well. This would increase the unemployment level in the USA and would dramatically effect both consumer and producers within the USA. We would see that imports would become highly expensive but exports a lot cheaper if they can source the materials locally.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    There are various reasons as to why the Chinese government would do this the first one would be that we would see that Chinese imports becoming very expensive and thus this would slow down the growth in china. Secondly china have large amounts of us dollars and it has become an asset to china if the strength of the dollar falls this "saving" deteriorates and will be worthless. This would all harm the Chinese economy and the countries savings.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households are benefited as the Chinese government want to uphold a strong dollar and this means that goods, taxes and holidays become cheap for the American consumer. They are also hindered as we see a fall in domestic production and this a fall in employment plus there is also a lot of control given to china putting the us in a vulnerable position.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I think that the us will always have to rely on foreign fiance as it tries to continue this "American lifestyle" in which they are all so accustomed to. I know that the Obama is trying to reduce this deficit as is every country but none the less i never feel that the USA will be able to reach a positive current account as it is not strong in the primary sector or that of the secondary. I think in the long run America needs to try get some control back so that the country isn't so vulnerable to foreign powers as this could become diplomatically dangerous to the people and the world.

  30. daniel.echl.f09on 07 Dec 2010 at 9:53 pm

    Hi Ralph,

    good responses to the question i think that all your answers show a comprehensive understanding of the topic. With question 4 do you really feel that the us will be able to cope without foreign finance. I feel that the USA will also need some sort of aid in order to maintain the lifestyle they have given to its people but i do agree at some point server cutting needs to be put in place i don't think that Obama has done this well enough. I also agree with you that the American populous don't really understand as to why this needs to happen and i think this is a failure of those in power

    Dan

  31. masaya.echl.f09on 08 Dec 2010 at 9:43 am

    Week 45 Economic Blogosphere

    Masaya Ando

    * Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China decides to change its foreign reserves to another currency, the value of American dollars would drop tremendously, making Chinese exports more expensive to Americans producers and consumers. However, the positive side of depreciating dollar is that American firms that specializes in exports would prosper because they would earn more foreign currency per dollar from foreign sales.

    * Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is highly unlikely that China will dump American dollar reserves because first of all United States is China’s number one customer. Without American consumption, China would not have been able to prosper, and without China, America would not have been able to maintain its strength in dollar. The status quo benefits China because by purchasing American government bonds with dollars gained from exports, it allows US to continue to exist and “feed” the Americans to consume more via government policy such as subsidy. It creates a convenient and efficient cycle for China.

    * How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefits from China’s financing of the government’s budget deficit because they are entitled to US social safety net that are funded by government bonds purchased by China. Ironically, Americans are feeding themselves because their consumption Chinese product is enabling China to purchase US bonds in which its borrowed money enables US government to fund for social welfare.

    * Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    American is currently operating a large current account deficit – borrowing more money than it actually makes. At some point of the history, I do believe America should stop borrowing money and focus more on reducing costs and move away from foreign investment. Yet, the American lifestyle desired by many Americans is hindering to do so. Politically speaking, the Chinese purchase of US government bond is diplomatically disadvantageous for United States as the country looks weaker when it is a debtor nation.

  32. masaya.echl.f09on 08 Dec 2010 at 9:57 am

    * Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China decides to change its foreign reserves to another currency, the value of American dollars would drop tremendously, making Chinese exports more expensive to Americans producers and consumers. However, the positive side of depreciating dollar is that American firms that specializes in exports would prosper because they would earn more foreign currency per dollar from foreign sales.

    * Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is highly unlikely that China will dump American dollar reserves because first of all United States is China’s number one customer. Without American consumption, China would not have been able to prosper, and without China, America would not have been able to maintain its strength in dollar. The status quo benefits China because by purchasing American government bonds with dollars gained from exports, it allows US to continue to exist and “feed” the Americans to consume more via government policy such as subsidy. It creates a convenient and efficient cycle for China.

    * How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefits from China’s financing of the government’s budget deficit because they are entitled to US social safety net that are funded by government bonds purchased by China. Ironically, Americans are feeding themselves because their consumption Chinese product is enabling China to purchase US bonds in which its borrowed money enables US government to fund for social welfare.

    * Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    American is currently operating a large current account deficit – borrowing more money than it actually makes. At some point of the history, I do believe America should stop borrowing money and focus more on reducing costs and move away from foreign investment. Yet, the American lifestyle desired by many Americans is hindering to do so. Politically speaking, the Chinese purchase of US government bond is diplomatically disadvantageous for United States as the country looks weaker when it is a debtor nation.

  33. masaya.echl.f09on 08 Dec 2010 at 10:34 am

    @Mattea and Sara

    US is currently considering to set up protectionist measure against Chinese deliberate depreciation of yuan. The Chinese export is hurting the American economy because domestic consumption is waning in US. However, this measure would reversely hurt the American economy because the Chinese gains of US dollars enables their purchase of US government bonds.

  34. Matt Beattieon 07 Nov 2011 at 7:41 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China decided to change its foreign reserves to another currency the value of the US dollar would depreciate as the US dollar would not be flowing back into the economy. This means that as the demand for RMB increases in USA the supply of dollars in China is also increasing.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    If China were to do this the value of the RMB would increase meaning importing Chinese goods would no longer be cheap in the eyes of other countries. This would hurt China's manufacturing industry and slow down the growth in China. As well as slowing down the growth in China, if China were to decide to change its foreign reserves to another currency the US dollar would depreciate and the bonds which China had previously bought would become worth less than if the were to carry on buying American bonds.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefit from China's financing of the government's budget deficits as it keeps the RMB's value low making Chinese goods seem cheaper and allow American households to consume more of their goods. Furthermore, the money comes back into the economy through government spending or tax rebates. This boosts the American economy through ways such as better infrastructure or lower interest rates on loans. American households suffer from China's financing of the government's budget as their is a fall in domestic production in America as the Chinese goods appear cheaper.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I don't think that America can continue to finance its budget deficits through the continued sale of debt to foreigners forever, because as they sell their debt they are increasing it through more spending. This will lead to an increase in the deficit as they are borrowing money which they cannot pay back.

  35. Nathan Pon 07 Nov 2011 at 9:17 pm

    1. The value of the dollar will depreciate sharply if the Chinese government decided to dump their holdings of the US$. This will lead to an increase in US exports, as the exports seem relatively cheaper to foreigners, but at the same time, Chinese imports will seem to increase in price.

    2. China benefits from holding vast amounts of US assets, because China owns $1.4 billion of US Assets. This $1.4 billion makes up a vast amount China's national wealth, and if it were to simply disappear, then China would lose almost all of its national wealth.

    3. American households benefit from China's financing of US government debt because they will be able to keep consuming beyond their normal means. This is a problem though, because the US national debt will keep increasing, and will eventually grow extremely large.

    4. It is unsustainable for the US to keep financing it's budget deficit through selling it to foreigners. This is because the future of the US will become almost entirely in the hands foreign nations like China, who might own a considerable amount of US assets. With the large amount of US debt, foreign nations will be able to control not only the American economy, but to an extent, the entire worlds. Also, with the continual sale of US national debt, the actual size of debt will continue to grow, and if the US don't raise taxes in order to decrease the size of the debt now, then it will be even more unlikely for taxes to be raised higher in the future to decrease an even larger debt.

  36. Susanneon 07 Nov 2011 at 10:33 pm

    1. The value of the dollar would depreciate because the Chinese demand less dollars.

    2. If China were not drop their dollar holdings, the value of the Chinese RMB would increase, making Chinese goods more expensive and less attractive to foreigners. Also, by changing its foreign reserves to another currency, China’s existing assets would lose value as the value of the dollar would plummet.

    3. The Americans benefit from China’s financing of the government’s budget deficit because it results in a strong dollar, making the Chinese RMB appear cheaper and allowing households to consume more Chinese goods. On the other hand, the Americans rely much more on Chinese imports, which harms the domestic good production.

    4. The way I see it, is that in the short run both China and the US appear to benefit from China’s purchase of government debt. However, in time, it is important to point out that the US is attempting to reduce its debt by increased spending, which will undoubtedly lead to an even larger deficit. Therefore, I believe that at some point America should find another way to finance its budget deficit.

  37. […] for somebody who prefers basing their trades on charts, forex fundamental analysis is important. There are basically two types of currency exchange trading: forex fundamental analysis and technical…the world economy while technical analysis looks at charts. In this article we will consider the […]

  38. Beatriceon 08 Nov 2011 at 12:42 am

    1. The value of the US dollar would depreciate since the Chinese dump their dollar holdings(less demand for dollars). If the US dollar drops Chinese imports to US would be more expensive. On the other hand US exports will increase as US goods will seem cheap to foreigners.

    2. It is highly unlikely that China will do this, because it is profiting from the US assets that it owns. So by changing its foreign reserves China would lose value of the assets. Furthermore if China changed its foreign reserve and the US dollar dropped, the Chinese RMB value would increase. The appreciation of the RMB will lead to a a drop in Chinese exports and Chinese goods will seem more expensive.

    3. American households benefits from China's financing of the government budget deficit, because the Chinese RMB will seem cheaper to the US households, hence they will consume more. Housholds will be able to consume more; however if imports increase exports will drop causing a trade deficit.

    4. I believe that America cannot continue to finance its budget deficits through continued sale of debt to foreigners. In the long run America needs to find alternative ways to finance its budget deficits. If too many foreigners own US assets, they might be able to determine the US economy, hence the US should stop selling its debt as it is only increasing spending.

  39. Davidon 08 Nov 2011 at 4:30 pm

    1. The value of the US Dollar would depreciate in comparison to the Chinese Yuan. This would be the result of the Chinese dumping the dollar. The Americans would decrease importing goods from China, because now it seems more expensive to import goods from China. On the other hand, the US exports would increase because now the Chinese find it cheaper to import from the US.

    2. China dumping the US dollar holdings is very unlikely because China is profiting from the US assets they hold. If China would have dumped their US assets, their Yuan would become stronger (appreciate) which means that China’s export would decrease. China is a highly export dependent country, which means that it would be drastic for them if them if export decrease.

    3. The American household benefit from the artificial high dollar. It will be relative cheap to buy Chinese exports. But this leads to a trade deficit, because American import Chinese goods, but Chinese don’t import as much American goods.

    4. In the long run America needs to find a way how to decrease their budget deficits, because selling them to foreigners is not the way out. Because if they sell their budget deficits to foreigner, an drastically increasing number of foreigners own US assets; which would lead to America which is regulated by foreigners.

  40. Thomason 08 Nov 2011 at 5:09 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency? The value of the dollar would depreciate as the overall demand for the US dollar decreases.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US? First of all the assets are a source of income for China due to the interest rate on US assets. Furthermore if China decides to sell all the assets the value of them would rapidly decrease resulting in a loss of national wealth in China. However the main reason is that if the value of the US dollar decreases due to China dumping their holdings, the demand for Chinese imports would decrease (value of Yuan appreciates -> makes Chinese exports look more expensive)

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement? They benefit from the artificial high US dollar, which makes exports look cheaper. Therefore households are able to consume more.

    3. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not? I think it cannot continue to sale its debt to foreigners in the long term. First of all this makes the US dependent upon other countries. Furthermore if they buy more and more assets foreigners might be able to regulate the US economy.

  41. Emmaon 08 Nov 2011 at 6:54 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China were to do this the value of the dollar would go down, depreciate, because of a decrease in demand for dollars.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China would not benefit from doing this because they earn interest on their assets in the US. Also if they were to cause the value of the dollar to decrease, the value of the Yuan would consequently increase, which China does not want because it makes their exports seem more expensive to foreign consumers therefore decreasing their net exports.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    The high value of the dollar makes Chinese exports seem much cheaper, therefore letting American households consume cheap Chinese goods to their hearts content.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    The American's cannot continue to finance their budget this way because it gives foreigners too much control in the American economy. Foreign investors will become higher stake holders in American firms or have more government bonds than Americans. Selling debt to foreigners also make America very dependent on other nations.

  42. Francescaon 08 Nov 2011 at 7:38 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    1. The dollar would depreciate. The demand for Chinese goods and services is grater than the demand for American goods, so the demand for RMB in US is increasing as well as the supply of dollars in China. Chinese are buying American assets instead of goods.

    2. If the value of the dollar remains high, Chinese exports will be cheaper and more attractive to American consumers. China is unlikely to change its foreign reverses because it would lose value of the assets. Demand for chinese goods would be more expensive so demand would decrease. So china needs the value of the dollar to be stable.

    3. Americans can afford more products from china as interest rates and taxes have become lower due to china’s financing of the Us government’s budget deficit.On the other hand American goods are more expensive, thus there is not a lot of trade.

  43. Philippaon 08 Nov 2011 at 7:50 pm

    1. If China dumped their dollar holdings, there would be a significant reduction in the demand for dollars in China, therefore the value of the dollar would depreciate.

    2. China is unlikely to do this because if the dollar depreciates, the RMB will appreciate relative to the dollar. Therefore Chinese goods will appear more expensive to American consumers and there will be a lower demand for Chinese goods. On top of this, American assets would no longer be a secure and profitable investment for China. If it changes its foreign reserves to another country the balance between the current and financial accounts would not be balanced. Basically, both countries benefit from a strong dollar and a weak RMB.

    3. China’s financing of the government’s budget keeps the value of the dollar high so Chinese goods are cheap and Americans can fulfill their consumptive lifestyle. However, this causes a trade deficit with China which leads to higher unemployment in the export sector.

    4. If America continues to finance its budget deficits through sale of debt to foreigners, it will become increasingly dependent on foreigners which could lead to risky political situations including the fear of the US economy being ‘taken over’ by foreigners.

  44. Pvanderweijdon 08 Nov 2011 at 8:58 pm

    Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    1. Given the massive increase in supply of US dollars that would occur should China decide to dump their dollar holdings, the value of the dollar would drop dramatically.

    2. China is unlikely to do this, as it would cause the price of their products to suddenly appear incredibly expensive, which in turn would cause US consumers to demand fewer Chinese goods.

    3. American households benefit as it keeps interest rates on borrowing low, and allows them to enjoy a higher standard of living as they can spend more.

    However, they will suffer in the long run, as the trade deficit continues to increase and means that in the future Americans will have to pay off their massive debt.

    4. America is more likely to eventually default on their debt than they are to ever be able to repay it. So while America might be able to continue financing its budget deficits through the sale of debt to foreigners for now, eventually that debt will catch up to America, and the implications of that "catch up" range from the downfall of the dollar and the American economy to the worst global economic crisis in history.

  45. Debbieon 08 Nov 2011 at 9:05 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If the Chinese would dump their dollar holdings, then the demand for dollars in China would decrease, which would cause a depreciation of the US dollar.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    They would not do so because they do not want their currency to appreciate against the dollar, as they are a export dependent country who wish to have a low currency so that exports seem cheap to foreigners.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    It benefits the Americans because through the strong dollar Chinese goods seem cheaper for Americans and they can consume more. On the other hand, there is a trade deficit created causing unemployment in the export sector in America.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    America could keeping doing this, but it would make them very dependent on foreigners, which is not always a good thing.

  46. Penelopeon 08 Nov 2011 at 11:19 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China were to dump their dollar holdings, the value of the US dollar would depreciate, therefore the demand for the dollar would decrease.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is unlikely that China will do this because the Chinese would not benefit from it. There would be a decrease in the demand for Chinese products because their exports would appear more expensive to foreign consumers.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefit because the Chinese RMB would appear cheaper so they can consume more Chinese products at a lower price.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I don’t think that America can continue to finance its budget deficits forever. America will fall further into their debt in the long run and will become dependent on their foreign investors.

  47. Cedricon 09 Nov 2011 at 12:43 am

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    What would happen to the value of the US dollar if China decided to change its foreign reserves to another country is that the U.S dollar would depreciate, meaning that demand for the U.S dollar would decrease.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The reason why it is very unlikely that China would dump their dollar holdings is because its in their best interest. Dumping U.S dollars would mean that the dollar would depreciate. This leads to Chinese imports becoming more expensive for US consumers. Therefore U.S consumers demand more of their own goods while China's exports decrease. The Status quo benefits both China and the United States because keeping the dollar strong means that Chinese goods continue to have a high demand while a higher dollar also means that American citizens can continue to live their highly consumptive lifestyles.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefit from China's financing of the government's budget deficits because the RMB appears more attractive than the Dollar meaning that American households are more willing to purchase Chinese goods since they appear cheaper than American goods. However, American households suffer from this arrangement because a trade deficit between the United States and China is created since China demands less American imports, leading to larger unemployment rates.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I do not think that the U.S can continue to finance its budget deficits through the continued sale of debt to foreigners forever because if this were to happen, foreign nations would have too much control in the U.S economy by purchasing more government bonds and assets. This would mean that foreign countries would be able to regulate the U.S economy. Another issue is that the United States would become too independent on foreign countries.

  48. Chris Bon 09 Nov 2011 at 9:43 am

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China where to dump its dollar holdings, the supply for dollars would increase dramatically and result in a significant depreciation of the dollar.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China is unlikely to do this as this would mean that Chinese goods would appear relatively more expensive for American consumers.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    China's financing of the government's budget deficit results in low interest rates. In addition, US households can enjoy a higher standard of living than they would otherwise have. IN the long run, US households will suffer as they will have to pay of the debt with higher taxes and less social benefits from government spending.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    America cannot continue to finance its budget deficits through the continued sale of debt to foreigners forever as the debt will some day catch up to them. As the debt increases, the capability to payoff the debt decreases and eventually will lead to the default of the US economy.

  49. Danon 09 Nov 2011 at 11:58 am

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If the Chinese chose to dump their dollar holdings it would cause a large increase of the dollar in the foreign exchange markets and would result in the depriciation of the dollar.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The majority of China's exports are to the US, if they chose to dump their dollar holdings and cause the value of the dollar to depreciate, it would make Chinese goods appear more expensive to American consumers, and would harm China's exports. This means American consumers can benefit from cheap goods and Chinese firms can benefit from large quantities of exports.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefit because it enables them to buy products at lower prices due to the Chinese government's management of the exchange rate. However, lower costs of production in China mean less products are produced domestically in the US, and that could lead to higher unemployment rates.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I don't think that America can continue to finance its budget deficits through the continued sale of debt to foreign investors because the more debt that exists, the harder it will be for the US to pay off their debt. Also, it will make the US more and more reliant on foreign investors, which could pose security problems to the nation.

  50. Alexandreon 09 Nov 2011 at 4:42 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the US dollar would depreciate due to the drop in demand for US dollars.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    If China were to dump their dollar holdings, their currency would appreciate dramatically, which would make their goods appear much more expensive.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    They benefit from the Chinese financing of the government’s budget deficit as their borrowing rates are very low, and they can consume more. Eventually however, they will have to pay back their debt, which they will suffer from (when it comes to paying it off).

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    This is an unsustainable situation for the America, and if they keep on financing their budget deficits through the sale of debt to foreigners, they will most likely default on their debt, as they will not be able to pay it off.

  51. Tuturon 15 Nov 2011 at 3:12 am

    i know your friend Patrick!

    :O

    small world right?

  52. Nikon 17 Nov 2011 at 1:01 pm

    • Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China decides to dump the US dollar holdings, Americas Economy could suffer dramatically. Once the dollar is put into the market its value will decrease due to less demand. Once the value of the dollar declines the exchange rate declines. This would mean that Americans would have to pay more for imports (goods and services) from other nations due to the depreciated dollar.

    • Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China would not want to ruin Americas Economy due to the fact that they have been profiting from the US due to cheap export (to America) and profitable investments. China will invest their money into government bonds due to an increasing in interest rate, since the US uses the bonds to finance they’re deficits their is an almost certainty that China will gain profit.

    • How do American households benefit from China's financing of the government's budget deficits? In what way to they suffer from this arrangement?

    Almost every toy in America or plastic object is “made in china”. The American households have been being cheap Chinas products and been inconsiderate to American products. US firms have been suffering from the lack of demand, the products china offer are a lot cheaper. Most people have lost their jobs in the recession, the hope is that by using more of the tax money job opportunities can be created.

    • Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I think they wont. America is falling into greater debt each year, it will be very difficult for them to at some stage repay their debts. It will, once this stage occurs, have a dramatic effect on the American population.

  53. twilliamon 17 Nov 2011 at 2:36 pm

    1.The value of US Dollar will depreciate and there will be an increase in the supply of US Dollar.

    2.As this will affect their exchange rates and monetary value. China's currency will appreciate and it is afraid that it will affect exports since goods and services being export will become very expensive.

    3.American households will benefit the products from China which are low in prices.

    4. No, it is impossible for a country to finance for another country in the long-term because there are times when the economy changes and it brings deficit to their own country too.

  54. twilliamon 17 Nov 2011 at 2:38 pm

    # Chris B

    True, just like in reality. We can't pay someone's debt forever since we have our own financial debts to be payed off.

  55. Ozge_Elif_Ozeron 17 Nov 2011 at 2:39 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of dollar will depreciate because of the decrease in the demand for dollar.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    Because there is no beneficial side for China since they earn interest. The decrease in the value of dollar will lead to an increase in the yuan, and this will show the yuan more expensive in the international markets.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American consumers will benefit from the cheap products. However, there will be less american products and it can cause some problems for American firms.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    Till the breaking point that America faces, it will be able to deal with this problem. It would be better for US to not borrow money but limit the costs.

  56. Ozge_Elif_Ozeron 17 Nov 2011 at 2:42 pm

    @Nik

    I dont agree with you about the fact that a country cannot continue to support the other financially in the long-run. I think it is different for China and US, because there is an economic relation between them in which they will benefit in the long-run.

  57. nmolenkampon 17 Nov 2011 at 4:36 pm

    The problem of America is that it consumes more than it produces. And China is the one who actually solves this problem, however this also means that the U.S. depends on China’s actions.

    For example if China would decide to change its foreign reserves to another country then the U.S. dollar will depreciate extremely.

    Luckily for the Americans, China doesn’t want to see this happen either as it will effect them in a negative way as well.

    First of all the imports of Chinese good become more expensive, which means less attractive to American consumers and therefore the demand for those good decreases, which means that Chinese manufactures will be hurt and in the end also their economic growth. More importantly, it’s 1.4 billion of U.S. debt will disappear.

    Luckily the relationship between China and America suits China fine as they hold their status of valuable savings and cheap imports.

    American households also benefit from the high dollar and cheap imports coming from China. The strong dollar makes the prices of goods, imports and fuel to go down, also interest rate is very low, which benefits American households.

    I think the American households are not negatively affected right away from China’s financing of the government’s budget deficit, however they might be disillusioned about the deficit. They seem to think the huge deficit isn’t as bad as it appears as they can just continue consuming, however they are very much depended on the Chinese, which makes them vulnerable and dependent on their decisions. And from my view, this is pretty dangerous.

    This also brings me to the answer on the fourth question. I don’t think the American’s can continue this policy. They take a risk by depending upon foreign countries holding their debt, as they can’t control their actions.

  58. nmolenkampon 17 Nov 2011 at 4:41 pm

    # Ozge_Elif_Ozer

    I totally agree with your answer on the fourth question, that it would be better for America to limit the costs instead of borrowing money.

    However I am a bit uncertain about your answer on the second question, why is their no beneficial side for China?

    What about the fact that China can import their goods for a very low price, this seems pretty beneficial to me.

  59. Brian Mon 18 Nov 2011 at 3:23 am

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency
    If the Chinese dump their dollar holdings, the value of the dollar will depreciate, as there will be less demand for the dollar.
    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    If China damages the American economy that severely, it could have major repercussions upon the Chinese economy as well as the Chinese have been benefitting from cheap exports to the US. If they dump their dollar holdings, the value of their currency would appreciate, making their goods more expensive.
    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    American consumers benefit from the cheap goods and services from China. However, this has led to lower demand for products made in the US, which has resulted in increasing unemployment among people in the US.
    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    Eventually, America will have to default on their debt as they won’t be able to pay off their debt.

  60. Brian Mon 18 Nov 2011 at 7:13 pm

    @Ozge_Elif_Ozer,

    Do you not think that it there would also be some drawbacks in question 2, such as rising unemployment?

    Brian

  61. jcarrenoon 20 Nov 2011 at 7:08 pm

    There would be a depreciation of the dollar therefore leading to an inflation in which the welfare state of the US citizens would be highly hurt. On the other hand the other currency, in which the Chinese government decided to invest, would become stronger and therefore the welfare state of the other population would increase. As an example, instead of the US citizens going on vacation to Europe, it may be the European citizens the one that would go to the US on vacations.
    Because the US government would become less stronger and since the Chinese have invested most of their money into national bonds (US debt), they would be unlikely to get their money back thanks to the interests paid by the US government and that would be a major loss for the Chinese government since they have nearly trillions of dollars invested; and furthermore, the money invested by china into the US debt is getting into flow once again and is being used by the US citizens to buy once again Chinese products, producing a cycle, in which the Chinese are getting profit of the US debt. If they (China) dumped their dollar holding they would hurt badly their economy.
    American households are receiving money from the government thanks to the Chinese investment in US debt, and therefore the dollar is becoming stronger, what means that the foreign products would become cheaper allowing the middle citizen to enjoy high quality goods and services (luxury imports, vacations, etc.). On the other hand the American exports are suffering because they are becoming more expensive for foreign investor, so they are less likely to buy those goods.
    No, because some day, and that day may never come, those foreigners’ investors may get into trouble and ask back for help to the US government, and at that point the US government will not be able to respond positively, therefore collapsing the economy. Furthermore, if that ideology of continued over expenditure is inculcated to the citizens, they would continue to buy even more, getting more debt, and therefore making the US current account balance even worse, until one day in which a debt rating agency, as it has happened with Spain, says that the US is no longer able to return the money they are getting, that day the foreign buyers, afraid, would sell all their actives of national debt, collapsing the government ability to make capital flow.

  62. jcarrenoon 20 Nov 2011 at 7:11 pm

    I think that we also have to take in account that US households further than consumers, are also producers, and as they are holding these arrangement with China, with a strong dollar, their potential exports are being reduced and they are trading less. This is also a negative consequence for both the US households and the global economy.

  63. James Jowetton 21 Nov 2011 at 10:13 am

    # Nik

    I 100% agree with your answer to the fourth question. I do believe that their (America's) debt will become so big that they will no longer be able to repay it. This will have drastic effects on the American population as the government tries to create a positive balance of payments.

  64. James Jowetton 21 Nov 2011 at 10:23 am

    1. Because of the decrease in the demand for the dollar, the value of the US dollar would depreciate if China decided to change its foreign reserves to another currency.

    2. If the value of the US depreciates, two things will happen to China which don’t benefit them in any way. First of all, Chinese imports would become more expensive and thus make them less attractive to American households. This will in turn, harm the Chinese manufacturers and slow down China’s economic growth. Second of all, the US dollars are an asset to China. China’s $1.4 billion of US debt would disappear if the dollar depreciates. This would present a loss of national wealth. Furthermore, all the savings that make China unique would disappear as the dollar depreciates relative to the RMB.

  65. James Jowetton 21 Nov 2011 at 10:24 am

    3. American households benefit from cheap Chinese goods and services which they can import at a cheaper price than those produced by domestic US firms. Many of America’s industries will suffer as they cannot compete with the low prices that Chinese products present, thus leading to structural unemployment: this isn’t good for American households.

    4. I don’t think that America can continue to finance its budget deficits through the continued sale of debt to foreigners, because eventually their debt will become so big that they will no longer be able to repay it. This will have drastic effects on the American population as the government tries to create a positive balance of payments.

  66. Nabilon 21 Nov 2011 at 12:48 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China were to switch away from the dollar America’s economy would suffer as a result. The value of the dollar would decrease because the demand for the dollar would decrease as China decides to shift its reserves to the euro for example. With a weaker dollar consumption would go down in America and prices and interest rates would go up, however, exports would increase.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China is unlikely to do this because Chinese imports are mainly appropriated to the United States. A weak dollar would mean Americans would consume less Chinese products weakening Chinese exports. China will continue to purchase dollars because its exports rely on the dollar having a high value relative to the RMB.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American consumers benefit from China’s financing of the government’s budget deficit by allowing high dollar value; this results in most prices going down, interest rate decrease, and value of other assets such as the stock market and real estate will go up. Taxes also go down, all of these benefits allow Americans to continue to spend more then they need boosting both Chinese and American economies. However, American exports will decrease because of a highly valued dollar because they are more expensive.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    It is not a sustainable way of financing the budget deficit. If this trend continues then China will essential own America through its debt threatening its sovereignty and world peace.

  67. Nabilon 21 Nov 2011 at 12:58 pm

    @Dan

    I agree with your assessment that security problems will result from continued reliance on foreign investors by the United States. I think, i am not sure, that historical precedence can be found for this assertion.

  68. Quinn Richardsonon 21 Nov 2011 at 4:27 pm

    1.If China decided to change its foreign reserves from the US dollar to some other foreign currency, it would result in a strong depreciation of the US dollar relative to other currencies

    2.It is very unlikely that China will decide to reduce its purchasing of US bonds. Both China and the US benefit from the current status quo as it allows for the Americans to continue borrowing and demand high for Chinese goods.

  69. Quinn Richardsonon 21 Nov 2011 at 4:27 pm

    3.Having China finance US debt can be very beneficial for American consumers. Firstly, it keeps the value of the US dollar up therefore increasing the spending power of the American public on the global scale. Americans are able to purchase relatively cheap goods from overseas. However this action by the Chinese government can also be detrimental towards the US economy. It keeps the price of US goods high compared to its competitor's prices therefore reducing the demand for US made goods.

    4.The path that the US government is currently on is probably unsustainable going into the future. It reduces the governments ability to control its own economy as other nations become investors in America's policies and status quo. If the US decided to change its ways and attempt to reduce its current account balance by devaluating its currency, it would result in significant loses in demand from the US as domestically made goods would be more appealing.

  70. Talia Greeneon 21 Nov 2011 at 5:08 pm

    1. The value of the dollar would drop very sharply. Wages would not be able to keep up with inflation, which would hurt US consumers. The value of American assets would decrease.

    2. Chinese financing of US assets keeps Chinese goods at low prices for US consumers, ensuring that US consumers buy many Chinese goods. Also, if the value of the US dollar decreased significantly relative to the Chinese, it would make US goods cheaper than Chinese, encouraging foreigners to buy more American goods and less Chinese.

    3. They benefit because the Chinese financing allows for government spending on US consumers and lower taxes for US consumers, so they have more to spend. They suffer because it gives a lot of control over US government funds to the Chinese.

    4. It is unlikely that it can continue. There are already protests in the US about the level of control China has over the US debt, and it compromises foreign policy too much.

  71. Talia Greeneon 21 Nov 2011 at 5:10 pm

    @Quinn
    I agree with your answers. The level of control China has over US government funds is unsustainable, as you said it reduces the amount of control the US government has over its economy.

  72. Quinn Richardsonon 21 Nov 2011 at 5:14 pm

    @jcarreno
    I agree that is a matter of national concern for the US in terms of its debt held by other countries. If they were to loose confidence in the US's ability to pay interest on this debt, it would result in a rush out of US bonds and therefore a collapse of the US financial sector and likely the US economy as a whole. It is a path that is unsustainable going into the future. This also funds the appreciation of the US dollar therefore reducing demand for US produced products and subsequently hurting the manufacturing sector. It was also interesting that you pointed out debt rating agencies as their decisions decide whether or not a country can access funds. This could very well determine whether or not a government can survive.

  73. Dilan_Guneson 21 Nov 2011 at 7:40 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    There will be an obvious drop in the value of US dollar. And this will lead American’s to experience inflation that is because there will be no cheap products from China and the domestic producers will have a higher cost of production than Chinese producers that will increase the price levels and the consumers will less demand on buying things and US dollar.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    As it is said in the question China is unlikely to do this because US generally buy China’s exports and a less valuable dollar will cause Americans consume on Chinese products that will make China’s exports decrease in value.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households will benefit from China’s financing of the government’s budget deficits in terms of consumers. The value of dollar will be high and this will lead prices go down. Therefore, consumers will be spending more money on those goods and consume more. On the other hand, America will suffer in terms of its own exports because the dollar value is so high the products will be more expensive.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I think financing the budget deficit through the continued sale of debt to foreigners will not be the logical way for America to do. Because if so the budget deficit will increase and reach a point that America would not be able to pay a dollar.

  74. Bryan_DiLauraon 21 Nov 2011 at 8:16 pm

    1. If the Chinese were to dump all of their US dollar holdings, it would be very bad news for the US economy. The currency would drop in value very drastically, which would lead to large inflation, and more expensive imports. However, because the value of the dollar is really low, other countries are more attracted to buying US goods, which means that paying back the deficit will be much easier.
    2. It is extremely unlikely that China will dump all of it's US dollar assets, as they will significantly hurt the US economy (which is China's biggest consumer). Therefore, if the Chinese would hurt the US economy, they would also be hurting themselves. This benefits both countries, as China is able to continue to have massive growth, while the US gets to continue to exist.
    3.US consumers benefit from lower prices on goods, as they are imported and produced at a lower cost. However, this means that many manufacturing jobs are leaving the US and going overseas. This can cause unemployment in the US, as well as domestic firms having a harder time competing.
    4. I think that the US could continue this cycle for a few more years, but it couldn't happen for too much longer. Pretty soon the deficit will become so big that investors will begin to question if they will get a return on their money. This will break investor confidence in the US government and economy, and will eventually cause the destruction of the country as a whole. As soon as the US starts to pay off their debts though, they will begin to look good in the eyes of investors, and will allow them to continue for a long time. The only problem is, that requires a drastic change in US ideals, and a move towards saving vs. spending. This will be hard for the US public, but needs to be done if they want to survive.

  75. Bryan DiLauraon 21 Nov 2011 at 8:20 pm

    You make a very interesting argument about what will happen if the US continues the budget deficit. I never would have thought of money coming out of the banks. However (I am living in the US right now) what if the banks don't have any money either? This is pretty much the case right now…

  76. Merve Akpinaron 21 Nov 2011 at 9:50 pm

    1) Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China decided to change its foreign reserves, that would be a great disaster for USA. Since currency would drop very dramatically, the inflation could be unavoidable for USA. Every single product from China would be very expensive. But we can say that since the value of American dollars would decrease, demand for their product can increase, so it is a chance for them to recovery their economy.
    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    It is very unlikely that China would do that, because in such a situation, China is also the one who will be suffering. Because less valuable American dollars mean less Chinese products will be consumed by the people.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    American consumers can take the advantage of China’s financing of the government’s budget deficits. Because, dollar value will get high as a result of this prices will be going down, interest rates will be less and some other assets will rise.

    4 .Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    In my opinion America cannot continue to finance its budget deficits through the continued sale of debt to foreigners forever. Because when deficit increases, it is becoming impossible to pay the debts back.

  77. Merve Akpinaron 21 Nov 2011 at 10:03 pm

    Hi Dilan,

    We have same ideas about the topic; I also beleive that America cannot continue to finance its budget deficits through the continued sale of debt to foreigners forever. Because when deficit increases, it is becoming impossible to pay the debts back.

  78. Noah Flanikenon 22 Nov 2011 at 3:55 am

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the US dollar would drop by a very large margin, especially since the Chinese possess such a large quantity of dollar holdings. If the Chinese chose a different currency, the demand for the dollar would drop, thus creating less consumption and thus less production is needed, resulting in lost jobs and a high unemployment level. The one upside is that the quantity of exports would rise since goods that the US is exporting would be relatively cheap for other countries with a stronger currency.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The US’s having a stronger dollar results in higher levels of consumption. Since the US relies on China for so many goods, this would hurt China if the US stopped buying as many of their goods. In order for US consumers to keep buying from China, the price of Chinese goods must be low relative to the US dollar. For this reason, China will not benefit by letting go of its best consumer: the US.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way do they suffer from this arrangement?

    China’s financing of the dollar allows the US to maintain a high dollar which results in their ability to consumer more, especially Chinese products. One of the issues or disadvantages though with the Chinese government financing the US government’s budget deficit is that the US cannot export as many goods to China since consumers in China will regard US products as being overpriced and/or very expensive compared to their RMB.

    4.Do you think America can continue to finance its budget deficits through the continued scale of debt to foreigners forever? Why or why not?

    I do not think that the US can continue to finance its budget deficit through the sale of debt to foreigners since. The US economy is suffering because the US is not producing enough of its own goods. Because the US relies on foreign countries such as China to produce its goods, many Americans are losing jobs. Although China could, if given the choice, probably continue to finance the US deficit for a long time to come, although the US will be at the losing end of this agreement.

  79. Noah Flanikenon 22 Nov 2011 at 4:01 am

    You make a very interesting point in the last question. I hadn't thought of it this way, but yes if the US continues to let China buy its deficit, China will basically own all of the US's shares. I can tell lately that the issue of importing a lot of our goods from China as a negative factor in the US economy is a strong topic of debate and an issue many candidates are bringing to light. Also, news shows have segments dedicated to talking about "bringing America back to America" where they completely remodel homes with only US made goods. It seems that the US is using a lot of publicity to encourage people to buy US goods. To me this seems like the right idea. Instead of forcing China out of our economy, the US is making the consumers choose and encouraging them to choose US goods.

  80. Noah Flanikenon 22 Nov 2011 at 4:23 am

    Re: Brian M

    Referring to what you said in the last question, this is a reason why the US must find a way to produce more and consume less. Although China might be able to finance the US deficit for a while, they cannot do this forever and thus it would be better for the US to turn this deficit around now rather than be faced all of a sudden with the fact that they have to default on their debt.
    Noah

  81. Asucan Odcikinon 22 Nov 2011 at 8:04 am

    1)Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    If this situation happens, the economy of US will suffer. The reason is that when China gives up using dollar and shift to another currency such as euro, the demand for dollar will decrease which will decrease the value of dollar as well.
    2)Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    The USA is a good place for China to export goods because US consumers need Chinese imports as they consume more than they produce. And the first basic reason is Chinese products that are imported, are very cheap. So in order to keep the high demand from the USA, China should keep their products’ price at lower than the US dollar so that they can have a good rate of export.
    3)How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    The households benefit from low prices as they import Chinese products which are very cheap and Chinese government’s decision on exchange rates. This keeps dollar value up which is also beneficial for the USA economy. On the other hand, while they are benefiting from cheaper prices because of Chinese products in the market, the domestic producers can suffer from these lower prices so they can lay off workers which can cause an increase in unemployment in the USA.
    4)Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    I think America will continue to go like that for several years but after that they will be in a situation in which they won’t be able to continue to finance its budget deficits through the continued sale of debt to foreigners. Also in my opinion, they should not continue like that as it makes US economy more reliant on other foreign economies which can put the USA in a bad economic situation.

  82. Asucan Odç?k?non 22 Nov 2011 at 8:08 am

    Hi Dilan,
    I think you made a good point about the question 3. Commenting on US export rates as a result of China's financing and the bad effects of this outcome to the USA economy. Also your comment to the last question is very accurate and logical and I also think like you that the USA could not continue to finance its budget deficit from foreign economies.

  83. Nesibe Zirzakiranon 22 Nov 2011 at 9:38 am

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    As China switches on euro instead of dollar, the value of US dollar will fall so the American economy will suffer. That will be causing a scene where the exports would get highly expensive imports whereas exports are getting highly cheaper.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    Because it would cause the imports to be very expensive which would slow down the Chinese growth. US consumer, also needs the Chinese imports because they have higher consumption than production and that's why China should keep their export prices low in order not to lose American consumer.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    The benefit will for American households as tthe value of the dollars will be high leading the prices to decrease. The problem is that for American economy, the cheap Chinese imports will float on the market which will increase demand for foreign imports rather than the domestic products so domestic producers will suffer; laying off workers; unemployment.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    The problem with the America is that the consumers are very reliant on the foreign products and consumption. US also borrows money in order to deal with deficit but they have to be reducing costs instead and stop relying on the foreign investment. As long as this is achieved, America can go through the tough process.

  84. Nesibe Zirzakiranon 22 Nov 2011 at 9:42 am

    Hi Asucan,

    I agree with the idea that China should keep their products' price at low in order to have a higher rate of export.

  85. Nesibe Zirzakiranon 22 Nov 2011 at 9:44 am

    Dear Merve,

    I did not consider the effect of value of dollars on the interest rates, good point :)

  86. M.Murat SEKBANon 22 Nov 2011 at 10:11 am

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    1)If China dumped their dollar holdings and this situaion realized, the US will suffer. Since the demand for dollar will fall, it will cause to decrease the value of dollar as well.
    2)If the value of dollar remains high, the Chinese firms’s product will be more cheaper and this will be more attractive for the US consumers. China is unlikely to change its foreign reserves, it will increasing effect on the products and the demand for Chinese goods will be fewer by the US consumers.
    3)China’s financing of the government’s budget controls the value of the dollar high. That is why chinese products are cheap and Americans continue consumption. As a result, this situation causes a trade deficit with China.
    4)I don’t think that America can continue to finance its budget deficits forever. In the long run, there will be many changes in the economy of a country during that process and it also brings deficit to the their country.

  87. M.Murat SEKBANon 22 Nov 2011 at 10:14 am

    @Asucan
    I really liked your responses. As you said in the first answer ; If the demand for the dollar fall in China, they will shift to another currency. As a result of this the US may suffer.

  88. Jaime Ariason 22 Nov 2011 at 11:23 am

    •Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    Well as it is mentioned in the extract: “China’s purchase of American assets keeps demand for dollars on foreign exchange markets strong”.
    This exchange will cause the US dollar to drop its value which could cause economic problems on the US as it wouldn’t be able to import as much as they do.
    •Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    If China keeps the value of Dollar high it can still benefit from the exports which are sold in the US. It actually better for the Chinese to have reserves in Dollars because if the Dollar rises its value they will have more money.
    China wouldn’t do it also because right now the dollar is one of the most valuables currencies in the world.
    •How do American households benefit from China's financing of the government's budget deficits? In what way to they suffer from this arrangement?
    Their Governments keeps working and being powerful providing them with the necessary goods, public services, roads, security…
    In the other hand it is bad because this makes US consumers buy more Chinese goods which will make China more powerful.
    I have to say that it is a very intelligent strategy.
    •Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    No, because at some point there will be a crisis that might affect everyone in a really hard way so that the US government collapses which will cause its debts to be higher, then US debt buyers will try to take the money bank and this could cause serious problems on the World and US not only economically.

  89. Jaime Ariason 22 Nov 2011 at 11:27 am

    @ Ralph.echl.f09
    Hi Ralph,
    I pretty much agree with all your answers and i think you did a good job as they are straight to the point which sometimes is easier to understand what someone means. Thanks your questions helped me to understand better the issue

  90. nchaneliereon 22 Nov 2011 at 1:11 pm

    Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    As citizens in the US are scared of (and should be) if China dumps their dollar holdings, it would lead to a depreciation in the US dollar, leading to high US exports because they will be cheaper. In the meantime, Chinese exports will be higher in price.

    Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China has tight bonds with the US, by owning over a billion dollars in US assets, and if it were to dump their dollar holdings, the Chinese currency would increase in price, therefore lose trade because other countries do not see them as the cheapest option, greatly affecting the expanding economy of China in its manufacturing as well as the whole economic growth of the nation.

  91. nchaneliereon 22 Nov 2011 at 1:11 pm

    How do American households benefit from China's financing of the government's budget deficits? In what way to they suffer from this arrangement?

    China finances the government’s budget deficits, which is eventually spent back into the economy in services (housing, schooling etc.) which allows money to flow in the economy and keep it stable. As well as this, American households will have the allusion of still being able to afford their products since they are so cheap. This is a short-midterm solution because after years and years of borrowing money from China, the US budget deficit will become huge, and this can alter the economy, as we can see today in the current US economy that is massive.

    Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    America can definitely not continue to finance its budget deficits through the continued sale of debt to foreigners forever. If they do, other countries will possess so many assets of the US that they themselves will be able to control the US economy. By doing so, they will continue to grow their never ending debt and create even more problems for the future.

  92. nchaneliereon 22 Nov 2011 at 1:20 pm

    Yes Jaime, one of the main aspects that American households benefit from is that the money given to the government and then spent back into the economy through services and jobs. As you have probably seen last year, when money is flowed onto the economy it multiplies (see multiplier effect) which in the end benefits many people around the nation.

  93. Frederico_Con 22 Nov 2011 at 3:37 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the dollar would drop dramatically as the demand would have fallen by a major percentage. Thus the US would be losing a lot of buying capacity due to the extremely low value of the dollar. Personally I believe that the European countries would be quick to invest overseas, and this would raise the dollar again. Nonetheless what would definitely happen is a US dollar downward spiral.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China would not do this because in a sense this investment in the US is providing China with a stable long-term income. In other words, buy spending money on the US they are making more money and in massive amounts; this makes a withdrawal highly unlikely.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households will benefit in two ways, which is that the state will be a better provider of social services, as they have an increased spending budget for these things. But the households would also benefit because their currency would be more valuable abroad, making investment cheaper and also foreign goods and services more affordable.

    They will suffer from this because US exports are not attractive to foreign governments and firms as the prices are higher than those of other countries. This could cause a decrease in employment and the higher prices will also lead to inflation.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    According to what our parents would say, the answer should be no, because we should never put all our eggs in one basket. What we have seen lately also suggests this, we see that the tensions between the two countries do lead to some negative economic impacts. Nonetheless the opinion portrayed through this article is that China has invested too much in the US to be able to pull out without having to face some difficulties. Also the US economy is quite a large and attractive one, so perhaps they might be able to rely on debts for a long time, but not without trying to correct the deficits every now and again; thus a bit more domestic sustainability is desirable.

  94. tsekineon 22 Nov 2011 at 3:38 pm

    1&2) Many people in America are in fact terrified that the Chinese might dump their dollar holdings into their market, simply as the Chinese imports will now be sold in the market at a significantly higher price than before (due to the significant decrease in the value of the US dollars). In other words, the US economy will face inflation, even though American exports will be a lot cheaper in price. It is very unlikely that China will dump their dollar holdings into the United States as doing so would cause the price of Chinese imports to increase significantly and make them “unattractive”, which will eventually harm the Chinese manufacturers and slowing economic growth in China. This status benefits both China and the US as China would be able to balance their current account surplus and the US is able to purchase Chinese imports at a very low price.

    3) As Americans consume more than what they produce, the fact that China is suppressing the RMB value is keeping the US dollar strong. This means that American households benefit by being able to purchase Chinese imports at a relatively low price. In the extract things like “food, fuel, imports, manufactured goods,” Are mentioned to be lower in price with the strong US dollar.

    4) I think that America can continue to finance its budget deficits with their present methods of selling debt to foreigners to a certain degree, or up to a certain point of time. I believe that they will not be able to do this “forever”. It is simply too risky for investors to continue to lend the amount of money that they do as of now. On top of that, America is spending more money/income compared to what they produce or make and continue to do so, which in logical sense does not really make a lot of sense if they are in ‘debt’. However, it seems as if China would continue to ‘support’ or buy American debts, because of the benefits they can receive from the purchase.

  95. tsekineon 22 Nov 2011 at 3:45 pm

    To comment on your response on the third question, good thinking! I was also thinking about the fact that China's financing (of buying debts from the US) would benefit more of the American consumers and Chinese manufacturers/producers, but not really on the American producers and Chinese consumers. Although it should not really affect Chinese consumers as Americans do not produce as much to start of with..

  96. Frederico_Con 22 Nov 2011 at 4:04 pm

    1. Would the US really stop importing goods, I believe that they have become so accustomed to doing this that it would probably take a long time for the importing to stop or reduce.

    2. Considering that the US economy is becoming slower in growth and that the assets are becoming less valuable and are not returning as much as China may want. It is possible but still unlikely that they would pull out of the US.

    3. I agree with you, but I believe that there are more specific examples of the benefits such as holidays abroad. And for the negative impacts, increased inflation.

    4. I completely agree.

  97. Do?an Canon 22 Nov 2011 at 4:48 pm

    -Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    Of course there will be a decreasing in the value of the US dollar. This situation will effect a lot of things such as inflation. In the US the inflation will occur and at the result of this situation the products which are imported from China will not be cheap they will be very expensive. Also price levels will increase because the cost of production will also increase for domestic producers. As a result of this situation the cost of production will increase and the prices will increase so less people will be able to buy those products and demand will decrease.

    -Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China can't do a thing like this because they don't want their exports to decrease. In the world most of the countries buy the products from China because they are cheaper than the other countries. So US spend less money. If the situation which is just opposite of this occurs US will have to spend more money after a time period US will start to import less and China will export less. This situation is not good for both countries because of this China can't do a thing like that…

    -How do American households benefit from China's financing of the government's budget deficits? In what way to they suffer from this arrangement?

    This situation is beneficial for consumers because when the value of the US dollar high this will effect the prices. The prices will decrease and the people will be able to spend less money for the products. This situation has some disadvantages for the US such as exports. When the value of the dollar high while they are exporting they will have to spend more money…

    -Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I think this is not a good way for US because after a point they will not be able to pay money to foreigners and their debts will increase more.

  98. Do?an Canon 22 Nov 2011 at 4:50 pm

    Thanks for your answers
    I thought so much for the 4th question to answer but after I read your answer it became easier for me to understand the question :)

  99. Michael Mayeron 22 Nov 2011 at 8:32 pm

    Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the US dollar would decrease, because more money circulating means that each dollar carries less weight.

    Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    Because China depends on U.S.'s economy as much as we do. Also, we have a lot of debt owed to China, and if the money loses its value, what is the point of being repaid…

    Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    No, of course not. Eventually it will backfire. America needs to pay off its deficits before the debt becomes too unbearably large. Also, there is not infinite amounts of money to borrow outside of the U.S.

  100. Michael Mayeron 22 Nov 2011 at 8:36 pm

    Is it an interest rate on US assets? Or, is it simply that an increase in value of the US dollar will in turn increase the value of the assets China holds? I think that is an important aspect to clarify. Other than that, nice job.

    -Michael

  101. AydaAydon 22 Nov 2011 at 9:22 pm

    1.)Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If China decides to change its foreign reserves to another currency, the value of American dollars will be dropped. Also, this drop will affect Chinese exports in a negative way that their prices will increase more for consumers of the USA. Yet at the same time, American companies will benefit from this; they will earn more foreign currency from those sales with the foreigners.

    2.)Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China will not dump American dollar reserves as it is not also advantageous for its own country; since China make a high profit and money from the USA as a consuming country. So that China also benefits from this relation too.

    3.)How do American households benefit from China’s financing of the government’s budget deficits? In what way do they suffer from this arrangement?

    American households will be advantageous in this case, since they will have the chance to buy products at lower prices because of the exchange rate of Chinese. By this way, interest rates would be lessen.

    4.)Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I think at a point, America should stop borrowing more money. Instead of this, America may reduce the costs, and also to arrange the foreign investments (prevent them to some level). In the future it will be hard to pay back all those debts back.

  102. Yuval Oferon 22 Nov 2011 at 9:41 pm

    1. The value of the US dollar would depreciate since the Chinese dump their dollar holdings(less demand for dollars). If the US dollar drops Chinese imports to US would be more expensive. On the other hand US exports will increase as US goods will seem cheap to foreigners.

    2.It is unlikely as China will be so smart to put it in US government bonds, as their interest rates represent a very secure revenue for them. The US uses these bonds to finance its budget deficits. Additionally more of Chinese products will be bought as the American consumers (who were the once that bought chinese products in the first place) receive their money back and can spend them again. This is very profitable for the chinese economy.

    3 .This situation is beneficial for consumers because when the value of the US dollar high this will effect the prices. The prices will decrease and the people will be able to spend less money for the products. This situation has some disadvantages for the US such as exports. When the value of the dollar high while they are exporting they will have to spend more money.

  103. Mitchell Broughtonon 22 Nov 2011 at 10:01 pm

    -Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    There would be a huge depreciation of the US dollar, meaning its demand would consequently decrease.

    -Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The higher value the dollar has, the cheaper imports are from China, thus meaning American consumers will continue to purchase goods from China. If the dollar suddenly depreciated, China would lose a large amount of demand from American consumers, thus stunting its growth.

    -How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    Americans can enjoy cheap Chinese products, as well as being able to live "above their means". They suffer because there is a lot of risk involved if all of a sudden China stops buying US bonds. Additionally, there will be more unemployment because American goods will cost more due to a stronger dollar.

    -Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    Clearly American CAN continue to do this, and likely will; however, I do not believe this is a good idea. It simply puts them in further debt, and will make them reliant on China and other foreign countries. This could cause a huge problem in the future if China wants the money back on their bonds once the time comes.

  104. Mitchell Broughtonon 22 Nov 2011 at 10:05 pm

    Ozge, I agree with what you are saying in the 4th question. America will reach a breaking point some time, whether that is because China's economy ceases to grow, or they simply find a better way to invest their money. However, I feel the US is stuck with allowing China to continue lending money to them, as they have to attempt to pay off their previous debt. US is like a gambler who can't pay off his gambling debts, sooner or later the loan shark is going to get him.

  105. efanoe2on 22 Nov 2011 at 10:15 pm

    If China stopped financing the US budget deficit, it would result in a massive drop in value of the USD as the supply of dollars increases drastically, hence forcing down the price.

    The current situation is very beneficial to the Chinese economy because, by keeping the value of the USD relatively high, the value of the Chinese yuan is kept low in comparison, making exports from China to the US cheap for the Americans, increasing demand. If the dollar lost its value the price of Chinese goods would increase for the Americans decreasing demand.

    The Chinese willingnes to finance the US government budget deficit through buying bonds helps boost demand for said bonds thereby keeping the price up and thus interest rates low(er). This helps the US government finance its deficit so it can keep providing services for its citizens and/or keep taxes down. The article states that: "China’s purchase of American assets keeps demand for dollars on foreign exchange markets strong, thus the value of the dollar high relative to other currencies, allowing American firms and consumers the benefits of a strong dollars described above." The downside to this is that the price of American exports are kept high for anyone wanting to import American goods and services. If the value of the dollar dropped, American exports would become more competetive and could help accelerate economic growth in the US.

    The American households suffer from the arrangement in the sense that they never learn to properly balance income and expenditure.

    First of all, the article states that: "it seems likely that China will continue to be a willing buyer of America’s debt, thus the financier of Americans’ insanely high consumptive lifestyle."
    Secondly America can always finance any US dollar debt simply by printing more money. Of course this will have less fortunate results (inflation and massive drop in value of USD).

  106. Efanoe2on 22 Nov 2011 at 10:20 pm

    @Frederico

    I like your idea that "European countries would be quick to invest overseas" but do you believe they will buy bonds and stuff at as high a price as China, or would they rather try to directly make money off of the investment?

  107. Behiye Dasdemiron 22 Nov 2011 at 10:50 pm

    1)If it happens, the value of dollar would fall. Then because of the inflation, the market would suffer. That is why; the imports into the US would also be at high prices.
    2)If China does it, the demand for the US good would increase. This is because of the low value of dollar. As the value of dollar is low, the imports would suffer but the exports would increase because of the low prices. As China is a ‘saver’, this situation would damage its savings.
    3)American households would benefit the goods at lower prices because of China’s financing of the government’s budget deficit. Also, the value of dollar would be higher. However, it is likely that the branch of Chinese firms which are in the US would lay off workers or shut down. Thus, this would increase the unemployment rate in the US. Besides, since the value of dollar is high, the exports would be problematic and the domestic firms may suffer.
    4)If America can reduce the cost of production in the domestic firms and be dependent more on domestic firms, the problem would be eliminated. Otherwise, America would rely on more on the imports and dependent on the foreign economic actions.

  108. Behiye Dasdemiron 22 Nov 2011 at 10:52 pm

    Hi Penelope, I also agree that America can continue to finance its budget deficits. It better stop being dependent on exports, otherwise, its economy would be steered by the foreign economies.

  109. Caroline Mooneyon 22 Nov 2011 at 10:55 pm

    Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    If the Chinese were to dump their dollar holdings, it would lower the value of the dollar greatly, because they would have to just as well switch the currency and lose money. The US would not be able to maintain the static amount of imports.

    Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    It is not likely that China would do this because they are still beneficial from the exports based on the high value of the dollar. If they remain reserved with the dollar, their benefits will rise with the value of the currency.

    How do American households benefit from China's financing of the government's budget deficits? In what way to they suffer from this arrangement?
    America's household first benefits in the way that they will receive cheaper imports from China, and therefore can buy cheaper goods and have a higher budget to spend in general. America may suffer because if at any time China pulls their involvement in it, the households will have to begin to buy local products, in which the prices may be raised because they are the only option. There is a risk factor in being dependent on the goods of another country.

    Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    I think it is possible for America to continue to finance its budget deficits through the continued sales of debt to foreigners because it is a dependable source, yet it will only create more of a dependency on other countries and also send our own country into further debt.

  110. Caroline Mooneyon 22 Nov 2011 at 10:58 pm

    I basically agree with everything you say, but I'm curious as to how the lower interest rates come into play. Lowest interest rates for America households? Also, why is America not able to continue on this path if it already has, and is already in unchangeable amounts of debt. We have basically continued to dig ourselves deeper into debt, and no one has yet to stop us, so what's stopping us anytime soon?

  111. Julian Cuervoon 22 Nov 2011 at 11:53 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. If China decided to change its reserves to another country then the value of the US dollar would drop. The value of the stock market, real estate, and just about all other American assets goes down; interest rates would also increase. It would ultimately hurt the US economy.
    2.The status quo benefits China and the US because the Chinese demand for dollar denominated financial assets, like government bonds, corporate stocks and bonds, and real assets like real estate and factories, increases the strength of the dollar. By changing the status quo to China “stemming” the flow of dollars into American assets, the dollar’s value would plummet to record lows, leading to high inflation and eventually a balancing of America’s enormous current account deficit with China and the rest of the world.
    3.American households benefit from China’s financing of the government’s budget deficits because American households are able to obtain Chinese goods at cheaper prices. Many goods from China are cheaper due to the strong dollar that makes US exports more expensive. American households suffer from this arrangement because it hurts the domestic firms of the US, therefore decreasing the US employment if the domestic firms can’t effectively compete with the Chinese exports.
    4.I think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever. I think if the US can decrease its foreign dependency, increase its domestic firms’ efficiencies, and create more trade alliances with more developing countries in South America (as it recently did with Colombia and Panama), then it may reach a balance and repay its deficits. However, I think this is unlikely for political reasons. It is unlikely that these changes can occur under the current political set-up in which short-term successes are the main concern for politicians.

  112. Julian Cuervoon 22 Nov 2011 at 11:56 pm

    @ Caroline Mooney
    I agree with all your answers and I have also made similar claims for most of them. For question #3, I agree that American households benefit from China’s financing of the government’s budget deficits because this allows international trade and competition to take place. Americans can be offered more options and cheaper prices for goods. However, it also has its drawbacks as it can cause the US to become dependent of Chinese goods and it can decrease US employment levels if domestic firms aren’t able to compete with the Chinese exports.

  113. wchoion 23 Nov 2011 at 1:44 am

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    Since one of the main causes why the value of the American dollar is high is China’s extensive usage of the currency in foreign reserves, if China were to decide to change their primary reserve currency to say, the JPY, there is a chance that the value of the American dollar may plummet, for this may be an indication that China has lost confidence in the USD as a foreign reserve currency.
    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    This is unlikely because of a couple of factors involved in the economic relationship between the United States and China. First, China holds a lot of US debt which would be devalued along with the American dollar, causing a huge loss on China’s part. Moreover, a weak dollar and hence a relatively stronger RMB would make Chinese exports unattractive to American importers, hence damaging China’s export markets.
    The status quo will benefit China because it is able to reinvest its trade surplus in US government bonds without losing their value and making money off their interests. Also, by keeping the dollar high they can keep fueling their exports.
    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way do they suffer from this arrangement?
    Due to China’s financing of the US budget deficits, American consumers are able to enjoy the perks of a strong dollar. The price of food, fuel, imports, and just about everything else goes down. The values of all American assets increase. Interest rates decrease. Tax rates can decrease.
    American households may suffer from the effects of having a trade deficit and a large government debt. (for this debt could be more easily paid off if the USD were to plummet) Every year, a huge chunk of the federal budget (about 10%) is being used to pay off interests – this money could be used to stimulate the economy and provide social welfare for the American people.
    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    I think the most obvious sign of unsustainability is the accumulation of additional debt and the increased interests that it poses on the American government. As Americans continue to consume more from abroad than they actually can and their exports suffer, the national debt and hence the annual interests will compound. All of this money could be used to invigorate the economy and invest in emerging industries for future competitiveness. Also, it is not given that the international political situation is going to remain ceteris paribus. If Sino-US relations were to head to a very antagonistic future, then there is no guarantee that China would not use economic leverage it has over the United States for political reasons despite the economic implications. Even if they were not to, the United States’ influence on international issues that it disagrees with China may be hurt as a result of its indebted status.

  114. wchoion 23 Nov 2011 at 1:46 am

    Response to Phillippa

    Do you think that the consumptive lifestyle of the American consumers is healthy for a country's economy? Is it wise to consume more than you can?

  115. Haleigh Epleron 23 Nov 2011 at 3:02 am

    Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    The US dollar would plummet becauase there would be too many dollars available on the market at a given time.
    Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    The devalued US currency would negatively impact the Chinese economy because Americans would be unable to purchase Chinese goods because their dollar has less purchasing power, and there are higher interest rates with lower spending. China would also loose spending ability because of their purchase of the US debt.
    How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    The American consumer is able to purchase goods with a lower opportunity, fulfilling more wants, therefore improving there overall state; however, the US export market is hurt increasing the deficit. Recently the deficit has been a major concern because the American Congress is attempting to reduce the deficit through spending cuts and increased taxes.
    Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    I think America CAN continue to finance their budget deficits in this manner; however, I do not believe it will. Financing the deficit this way is costing Americans their jobs as well as lowering the GDP as American produces fewer goods. There has recently been discussion about what measures should be taken to decrease the sale of deficit as investors do not want the American economy so dependant on another country.

  116. Haleigh Eppleron 23 Nov 2011 at 3:05 am

    Though the trade is not decreasing below the market demand. The US goods are more expensive making them undesirable given the current demand. The US investment in China allows for Chinese goods to remain inexpensive by decreasing competition as well as supporting the Chinese economy because of interdependence.

  117. hwuon 23 Nov 2011 at 4:42 am

    Good analysis!

  118. Gunnhildur Omarsdon 23 Nov 2011 at 1:23 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If the Chinese would decide to dump their dollar holdings it would be very damaging to the US. First of all it would cause the value of the dollar to decrease drastically. This would also mean that domestic industry would become more expensive since the American producers would need to pay higher prices for resources, this would then directly lead to higher prices of products for consumers. Due to the increased price of imported goods and imported raw material it is likely that America will also face inflation.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    Since the situation benefits both countries it is very unlikely that the Chinese will dump their dollar holdings. It is beneficial for the Chinese for America to have a stable dollar because it means that the Chinese are able to export a very large amount of products to America, they products from China are cheaper than domestic goods and are more attractive to consumers. If that were to change then it would harm Chinese manufactures and slow growth in China. Another reason is that the US dollars are an asset to China and if China were to dump their dollar holdings it would mean that their $1.4 billion of US debt would evaporate, assuming that the US dollar would decrease drastically in value. This would mean a loss in national wealth for China.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    The consumers benefit because they are able to buy cheaper products, which are the Chinese imports, instead of buying the domestically produced products, which are more expensive. Interest rates are also low so US consumers spend more, as well as the taxes decrease. However in the long run this might be harmful for the US is that it might cause domestic firms to run out of business since consumers continue to buy Chinese products instead of American products. This might mean that America needs to rely on China for certain products.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    No, because their debts grow and grown and it is very risky to completely rely on another country to continue to buy the debts. America already has enormous debts and are worried about what China can do, and at some point it might happen that China decides to dump their dollar holdings and then US are in very big trouble.

  119. Gunnhildur Omarsdon 23 Nov 2011 at 1:30 pm

    Your approach on answering the question is very different from mine and I like it very much. It is interesting to see the concept explained with a supply and demand analysis and it makes me think of the subject in more detail. The second question where you say that China offers the products at an artificially low level is also a good explanation since they are in fact selling their products cheaper than they should because of the situation between them and the US.

  120. k.zurabishvilion 23 Nov 2011 at 4:47 pm

    1) Since China creates demand for US dollar and holds the large US dollar reserves. It contributes to strengthening American currency if china decided to change its US dollar reserves to other currency the supply of US dollars would increase tremendously and the value of US dollar would go down. Thus the currency would become weaker in terms of other currencies. This will cause inflation in Unites States.
    2) If the value of US dollar will go down with respect to Chinese currency, Chinese imports to united states will become more expensive, and thus Americans would by less Chinese products. It will harm Chinese producers and will cause a slower growth of economy and GDP in china, further the china holds US 1.4 billion debt which is an asset for china if the value of dollar falls and inflation happens in US the value of US debt would also fall, so china Would loose value of its investment relative to RMB therefore the stronger US dollar with respect to RMB benefits both china and USA so its unlikely that the situation would change
    3) Americans save very little of their earnings, in fact many Americans spend and consume more than they earn which means that they have to borrow continuously the same is true for US government America consumes more products than it produces the government budget deficit has been increasing for the last 9 years so in order to finance the deficit American government borrows money from the private sector and other countries by selling government bonds. One of the major bias of US debt and government bonds is China. The American households benefit from this because US government Uses this money to finance public expenditure and public goods. Such as social security, healthcare ETC.
    however since Chinese products compete with American products successfully the demand for US products goes down so production of US products goes down this contributes to the bankruptcies of SME in US and Leads to the loss of jobs. Such situation slows down growth of American economy.
    4) Americas budget deficits add up to year to year and America’s foreign debt increases continuously. Interest payments on this debt are very volatile and are subject to market fluctuation. IF interest rates go up. It would become more and more expensive to United States to pay back its loans. Big share of US GDP and budget revenues would be spent on serving the debts. This means that the government would be able to finance less public goods. Given the fact that BABYBOOMERs are retiring in the next 10 years and the governments social security payments and medical payments would have to increase this poses a serious risk that America will not be able to pay interest payments on its debts in the future and may go bankrupt. Therefore to avoid insolvency United states should take serious measures now and try to balance its budget and start to pay back and reducing Americas foreign debts.

  121. k.zurabishvilion 23 Nov 2011 at 4:48 pm

    RE.to Carolina Mooney

    I don’t fully agree that china is likely would stop exporting its products to US any time soon because Chinas economic growth and production depends very much on foreign demand such as US because it’s a large costumer. I agree that there always is a risk to be dependent on foreign goods but on the other hand the selection of products is larger for US consumers. I also disagree with the fact that America can borrow from foreigners to finance its budget deficit forever. Because in the time of economic crises and recession foreigner countries have their own problems and may need to lend money to their own government and put it into their own economy rather than helping US government.

  122. Jackson Moteon 23 Nov 2011 at 5:52 pm

    At the moment, I believe that China holds the fate of the US in their hands. If China reduces the amount of dollar holdings, the American economy will plummet further than it has before.

  123. djohnon 23 Nov 2011 at 6:33 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    From the article China is a country that is opposite to what America does. In China the country produces more than it consumes whereas in American the country consumes more than it produces. If China does dump their dollar holdings in America then the value of the American dollar will weaken. When the American dollar weakens the price of food, fuel, imports and many more products will get affected as the price will rise. Whereas for stock markets, real estate and other American assets the price will go down. Citizens of America will be greatly hit but on the other hand the citizens of China will gain a profit as their new currency will be stronger which means that the price of food, fuel and imports will be low and for personal assets the price will be higher.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    If China dumps its dollar in America it will affect the imports as from the article it will be more expensive to American households therefore making it less attractive and it will lead to affecting Chinese manufacturers and will slow the growth rate in China. Also if China dumps its dollar then its exchange rate value will increase causing exchanging of currency to decrease as it is expensive. This would lead to a loss of national wealth to China as the $1.4billion US debt will ‘evaporate’. US is an asset to China so for this reason China is more towards the unlikely side to dump its dollars.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    China is issuing bonds; it means they want to eradicate their deficit. Since they want to reduce the prices of their importing products American households will get imported goods at a cheaper price as Chinese products are made to attract Americans. Lifestyle commodity prices will come down. From this arrangement the only way that they will suffer is the risk of the dollar value in the international affairs will become weak.
    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    In my opinion no it cannot continue to finance its budget deficits through the continued sale of debt to foreigners forever because foreigners are aware of the plight. Foreigners are going to come to the point where they do not want to exchange money at that specific rate. The more debt the US comes to, the harder it is for them to pay the debt. Foreigners will soon become part of US assets if the US continues sales of debt to foreigners.

  124. Mehmet M Sumaon 24 Nov 2011 at 9:33 pm

    1. Depreciation of the dollar would be seen. This would be the end of the highly consuming life-style of America because of the expensive imports.
    2.The USA is a principal consumer for Chinese products. The expensive imports would not be attractive to the US consumers. It would harm the economic growth of China. Besides, US dollar is an asset for China. China wouldn't want to reduce the value of its asset.
    3. They benefit from the cheap imports, as China supports a strong dollar. However, the strong currency makes US goods expensive and harder to export. They are becoming less competitive. This is likely to cause structural unemployment.
    4. The deficit would become so large that China will question its part in the US economy. Besides, the US would not want to let China have the greater sovereignty in the US economy.

  125. Mehmet M Sumaon 24 Nov 2011 at 9:35 pm

    America trying to increase its debt ceiling might allow a large deficit in my view.

  126. Alexander Wallaron 28 Nov 2011 at 8:39 am

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    Since China is a major customer for American currency, if China were to dump their dollar holdings, the demand for the dollar would decrease substantially. If there is a sudden decrease in demand, the supply will be higher than the demand in the short run. This means that the dollar will be worth less than it was before and there will be a large rate of inflation. This high rate of inflation will decrease the purchasing power of the dollar and therefore make imports more expensive. Since the United States’ economy is firmly built off of imports and thus it has a current account deficit, the total price of goods will increase and thus make everything more expensive. This decreases the consumer surplus and causes a loss in consumer welfare. There are two plusses to this situation though. If the dollar loses value, American exports are going to look more appealing in the international market. This decreases the current account deficit but also decreases the capital account surplus. The other plus that comes from the inflation is increased employment in the short run. Unemployed consumers see that goods are becoming more expensive and therefore try to become employed in order to afford their wants and needs.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The United States is one of China’s biggest trading partners. If China were to get rid of the American currency, there would be devaluation in the dollar because of decreased demand as explained before. This decreases the purchasing power of the United States, and thus the United States would import less from China because goods from China are going to cost more to the American consumers. This hurts the Chinese economy and therefore keeping the American currency is an incentive for economic prosperity in China. Also if China was to drop the American assets, goods produced in the United States would look more profitable on the world market and thus China would have produced a rivaling competitor in the international market – something that China wants to avoid.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefit from China’s financing of the government’s budget by having extremely cheap goods at their disposal. When China buys out American debt and purchases American currency, the purchasing power of the dollar increases. This means that the dollar is able to purchase goods from all over the world and it gives the consumer a variety of choices. Also, the market open to a consumer using the dollar is substantially larger than those using weaker currencies because importing goods do not appear to be as expensive. This means that the international market for the American consumer is very competitive. This leads to even lower prices and a higher quality of the good. American consumer can also suffer through this process because of their dependency on Chinese production. The problem is with China is that people see China’s production power and production ranking to be ever growing and sustainable. This is not entirely true. Since China has bought up the American debt, Americans are at risk of a Chinese economic meltdown or recession. America’s economy, because of how dependent it is on China, will suffer every single Chinese economic problem.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I do not think that American can continue to finance its budget deficits through the continued sale of debt to foreigners because of interest rates. As the American debt increases, so does the interest rate. When countries buy American assets, they are in essence lending America money to decrease its debt. This money needs to be paid back along with a certain percentage of interest. This means that America will have to pay back lending countries more than the amount of America’s debt. This is simply unsustainable.

  127. Alexander Wallaron 28 Nov 2011 at 8:44 am

    @ Mehmet
    For your answer to question 4:
    China enjoys having the United States in debt and enjoys even more owning the debt. Having China purchase our debt artificially increases the demand for American currency and therefore increases the dollar's purchasing power. This combined with the weak Chinese currency and cheap Chinese goods gives China an edge against competitors in the international market competing for America's imports

  128. abredeeon 04 Dec 2011 at 9:33 pm

    I think that the US could continue this cycle for a few more years, but it couldn't happen for too much longer. Pretty soon the deficit will become so big that investors will begin to question if they will get a return on their money. This will break investor confidence in the US government and economy, and will eventually cause the destruction of the country as a whole. As soon as the US starts to pay off their debts though, they will begin to look good in the eyes of investors, and will allow them to continue for a long time. The only problem is, that requires a drastic change in US ideals, and a move towards saving vs. spending. This will be hard for the US public, but needs to be done if they want to survive.

  129. abredeeon 04 Dec 2011 at 9:34 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    Since China is a major customer for American currency, if China dumps their dollar holdings, the demand for the dollar would decrease immensely. The supply will then be higher than the demand in the short run. Thus, the dollar will be worth less than it was before, which will result in inflation. The high rate of inflation will decrease the purchasing power of the dollar and therefore make imports more expensive. This will make many goods in the US more expensive. This decrease consumer surplus and thus overall welfare. However, this also has the advantages that the depreciated dollar will make US exports relatively cheaper and thus decrease current account deficit.

    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    The United States is one of China’s biggest trading partners. If China gets rid of the American currency, there would be depreciation in the dollar because of decreased demand as explained before. Thus the United states would import less Chinese products and this would damage the Chinese economy. Also, as stated previously, Us exports will increase and thus these may rival Chinese exports.

    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefit from China’s financing of the government’s budget by having extremely cheap goods at their disposal. Chinas supply of goods increases consumer surplus and decreases prices for American households. Consumers have acces to a greater variety and quality of goods.

    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I think that the US could continue this cycle for a few more years, but it couldn't happen for too much longer. Pretty soon the deficit will become so big that investors will begin to question if they will get a return on their money. This will break investor confidence in the US government and economy, and will eventually cause the destruction of the country as a whole. As soon as the US starts to pay off their debts though, they will begin to look good in the eyes of investors, and will allow them to continue for a long time. The only problem is, that requires a drastic change in US ideals, and a move towards saving vs. spending. This will be hard for the US public, but needs to be done if they want to survive.

  130. abredeeon 04 Dec 2011 at 9:35 pm

    so , do you think the practice of america is sustainable or unsustainable? Otherwise i agree.

  131. Jackson Moteon 07 Dec 2011 at 2:56 pm

    1. If China decided to change its foreign reserves to another currency, the value of the US dollar would drop significantly and most likely further the economic downturn that the United States is currently experiencing. Last week, President Barack Obama was quoted saying that "This is the worst economic downturn since the Great Depression". If China takes this action, the United States will be in real trouble of imports and exports

    2. It is very unlikely that China will take this action because China's main exports are to the US and this action could put this trade in jeopardy. The status quo will benefit China as well as the US because neither country wants to take action against the other because of economic repercussion. At the moment, the United States depends on China for cheap labor and ease of importation whereas China depends on the US to continue this international with the country. The American household benefits from this financing because it consolidates the debt which the US currently owns to China. However in the long term, this financing will hurt the United States because they will have to pay more back than was lent to them.

    3. America cannot continue to finance these budget deficits because eventually the amount owed would not be repayable. This will send the US economy to levels lower than the Great Depression.

  132. Jackson Moteon 07 Dec 2011 at 3:05 pm

    @Nabil

    Rergardless of whether the exports would increase from the US, this would not account for the major loss of importations to the US.

  133. selin tatlicanon 13 Dec 2011 at 1:47 pm

    1)Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    In this case USA economy would effect from this in a bad way, there would be a dumping in their dollar holdings. And the value of dollar would decrease. Because of that in American economy the inflation rate increases. This case may increase the price levels of Chinese products so that there will be less demand.

    2)Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    China is unlikely to do that because in this case USA will not be the only one who is in danger. Also China is the one who is going to effect from this in a bad way. Because the more US dollars lose value, the less Chinese products are produced. This will decrease the China’s exports.

    3)How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    According to the relation between the money and the price, when the value of dollar gets higher, the prices will go down. When the prices are less, the consumer starts to consume more and spend money. So that American consumers benefit from China’s financing of the government’s budget deficit.

    4)Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    I think America cannot continue to finance its budget deficits because when deficit increases too much, America will have problems to pay all of them. So that it is dangerous for American economy.

  134. Will Overhauseron 23 Dec 2011 at 7:21 pm

    1.Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    The value of the dollar would become very low, resulting in high US inflation, since there would be a huge amount of dollars on the market and not enough demand to meet the supply.
    2.Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    Since their currency would suddenly be less valuable, US consumers would not buy nearly as many imports from China because they would be so much more expensive. Also, China would lose all the money they had invested in the value of the dollar.
    3.How do American households benefit from China’s financing of the government’s budget deficits? In what way do they suffer from this arrangement?
    They benefit by continuing to have a strong currency that has many benefits in of itself. They suffer from the uncertainty that comes along with someone else having control over your government and economy.
    4.Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    No, eventually the balance will become so unstable that something will have to change.

  135. Will Overhauseron 23 Dec 2011 at 7:23 pm

    In #3, what ways do the Americans suffer form the arrangement?

  136. […] Excuse me, China… could you lend us another billion? Understanding the imbalance of trade between … […]

  137. jessicakennyon 16 Nov 2012 at 9:06 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The value of the USD would drop dramatically because the US is in a huge trade deficit, which would, under “normal circumstances”, pressure the exchange rate to lower, since there is low demand for American goods. However, with China investing so much money in American assets, the demand for the USD remains artificially high, which keeps the value of the dollar high.
    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It’s unlikely because the Chinese are “savers” by nature, so they sell more than they spend. Thus, it is beneficial for them to maintain a low RMB so that Chinese exports stay relatively cheap and desirable for foreign consumers. The only way for China to accomplish this is by buying a lot of American bonds, in order to maintain the supply of the USD low on the foreign exchange market, so that its value remains relatively high and the RMB’s value remains relatively low. Since the US benefits from a high dollar, this status quo benefits both nations. If China stopped this practice, the high demand for Chinese goods (which comes largely from Americans) would cause the RMB’s exchange rate to rise, making Chinese exports less attractive.
    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    They benefit because their culture of consumerism is sustained, since they can buy more than they produce because China injects money into the US’s circular flow, which can then be used by banks to loan to American households for their purchases of cars, homes, etc. If China did not finance the budget deficit, there would be no money for Banks to loan to American citizens. Households suffer from this arrangement because the lack of pressure for domestic production, causes unemployment and inflation, since even though many Americans don’t have jobs, consumption doesn’t decrease since China still finances it, so inflationary pressures aren’t abated.
    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    No, the 2008 credit crash is an example that eventually, if money is simply loaned heedlessly to consumers who do not have stable jobs and cannot pay for it, eventually the whole scheme will implode. For one thing, China expects to receive its investments back with interest – and the only way for the US government to fulfill this obligation is using tax money, which will only be available if Americans are employed and industries are producing.

  138. jessicakennyon 16 Nov 2012 at 9:28 pm

    @Will Overhauser

    In response to #1, I agree that the value of the USD would drop and there might be high inflation in the US, but not because the supply of dollars on the foreign exchange market is too high, but because a low exchange would make imports more expensive, causing higher domestic consumption, which might cause inflation because of the increased demand for a limited amount of American goods. In response to #2, I agree that China would not want to lose its investments in American bonds, but China is not as concerned with losing the US as customers to their products once Americans can’t afford imports when the dollar’s exchange rate is low, as much as they are concerned with maintaining their own exports cheap for the entire world.

  139. jzhengon 18 Nov 2012 at 1:51 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    If China decides to change its foreign reserves to another currency, the Chinese currency demand of the US dollar will drop dramatically, which represents a huge drop in the value of the US dollar.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    If the value of the US dollar falls, it is very likely that US demand of Chinese exports will fall, and will therefore also raise the value of the Chinese RMB. While the US demand drops, Chinese employment rate would also fall. In addition, Chinese foreign reserves of US dollar would lose its worth.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    American households benefit, as they are able to continue demanding from the variety of choices of imports from Chinese cheap exports. However, as most US demand goes to the Chinese exports, there is a relatively low aggregate demand in the US economy, thus the productivity and employment rate is low.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    No. If America continues running a deficit in exports while gaining profit in the capital accound, American income would naturally come to an end, as most income would go to the Chinese economy even if China invests their reserves back into the American economy.

  140. aaxler2on 19 Nov 2012 at 9:31 pm

    Abraham Axler

    • Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    o The value of the dollar would likely rapidly decline. This assumes that no other country is willing take buy US bonds in the quantity China has enabling the US to keep consumption high.
    • Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    o China benefits from a strong dollar in that US the largest importer of Chinese goods. America is so fond of Chinese goods because the exchange rate is such that they are relatively inexpensive to American consumers. Furthermore, the US bonds that China buys allows the US to spend beyond its means, often through the purchase of Chinese products. Not only do the Chinese get a guaranteed return on their investment through the interest rate on US bonds, they get a portion of money back immediately through exporting to the US. The US benefits by the availability and affordability of Chinese produced goods.
    • How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    o American households benefit from the funds gained through the sale of US bonds to China that are spent on government programs like free-preschool or “ cash for clunkers.” Additionally, they benefit from the cheaply produced Chinese goods like clothing, and electronic accessories. American households might suffer, because China’s financing is boosting the value of the dollar. If the dollar were weaker American produced goods would be more competitive in the world market. If demanded increased for American made products American producers would likely hire Americans, thus benefiting American households.
    • Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    o At certain point the sale of debt to foreigners becomes like Ponzi Scheme. The basis of a Ponzi scheme is that the investment from the new investors in the spurious business is use to pay the old investors. This becomes like a pyramid where there are eventually no new investors to pay the old investors and the base collapses taking down the whole scheme with it. As the fiscal cliff looms, it appears America is getting close to this point. The world market is far too volatile to be a reliable source of debt buyers. The Eurozone crisis is evidence that no country, or economic conglomerate is so stable that it can be counted on to buy US debt forever.

  141. rthornton2on 20 Nov 2012 at 3:27 pm

    Discussion Questions:

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If the Chinese dumped their dollar holdings, the supply of the dollar would increase greatly and the value of the dollar would plummet.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is very unlikely that China will dump their dollar holdings due to their trade relationship with the US. If the value of the dollar plummeted, Chinese exports would become more expensive, thus decreasing the demand for Chinese exports. The strong value of the dollar allows for Chinese exports to be cheap, therefore, the demand for Chinese exports remains high.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    American households benefit from China’s financing of the government’s budget deficits because the value of the dollar remains high. A high value of the US dollar results in cheaper exports from China. With cheaper goods available, the domestic consumers benefit. Domestic producers suffer the consequences for this as the value of the dollar remains high, making their exports become more expensive. Following this, the demand for American exports would decrease. There is also more competition for goods sold in the US as Chinese goods are cheaper, thus more appealing. American producers suffer loss of demand from China’s financing of the government’s budget deficits.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I do not think that America can continue to finance its budget deficits through the continued sale of debt to foreigners forever. The debt owed by America will continue to rise to a point where it is unlikely that they can pay off their debt.

  142. Anair2on 20 Nov 2012 at 3:58 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    The article above clearly explains that due to the fact that China purchases the American Assets, the demand for dollars on the foreign exchange market is maintained and thus the value of the US dollar is relatively high relative to that of other currencies however if these purchasing was halted then the value of the dollar would drop immensely as a result.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    It is very unlikely that China will do this and that if this were to take place it would mean that the Chinese products exported to China would not be as effective to the American consumer as the price would increase in relation and therefore damaging the Chinese manufacturers and affecting the nation’s economic growth. Essentially by doing this they are harming their own economy, which is not really, the typical approach by any economy, as the savings would drop greatly. Therefore this status quo helps stabilize and maintain the demand for their exports, which is a major component of their economy.

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    The American Households (consumers) benefit from the fact that with China’s financing of the government’s deficits in that the US dollar rises in its value as a currency and thus the government can spend on more with the same amount of money. Therefore consumer spending in the US will increase however this will only apply to foreign goods and thus Americans will be less willing to buy domestically produced goods and thus they will suffer from much higher rates of unemployment as the firms they work for will go bankrupt. Lastly this arrangement will mean that the US is in some ways controlled by China in that the deficit depends upon China’s decisions.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    The title of this article really summarize the situation ‘excuse me China could In my opinion it is very unlikely that America could continue with this in that it will only make things far worse and the deficits are not going to get any better. However when looking at America as a nation, it is definitely trying to reduce costs and the government is doing a good job of this. The fact is that if this were to continue it would mean that one nation would bring a halt it simply cannot continue as China may in fact desire a great deal of American goods and thus that will be quite difficult to get and maintain as their money lies in the government bonds. Therefore as this situation is prolonged it will only increase the issues with what may happen to the Economy in the US. Currently the US is dependent on the investments made by other nation but the fact is that other nations won’t finance another forever, economies are unpredictable and at any point in time problems may arise.

  143. seun2on 20 Nov 2012 at 4:19 pm

    1. Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    If the dollar holdings were dumped by the Chinese, the value of the currency will decrease greatly as there is a large supply of dollars in the foreign market.

    2. Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    It is very unlikely that China will dump their dollar holdings for many reasons. First, if the value of the dollar plummets and inflation occurs, the $1.4 billion of US debt would evaporate, leading to a decrease of national wealth. Next, it would make Chinese imports more expensive thus less attractive to American households, thus harming Chinese manufacturers and slowing growth in China

    3. How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    China’s financing of the government’s budget deficits is like a double edged sword. American households benefit from the financing because it helps the US maintain a strong dollar currency. A strong Dollar will allow the US to bring in exports from China cheaply, allowing a lower price level for many products. This will benefit the domestic consumers as they can get more cheap, accessible products. However, it will harm the domestic producers as this may lead to less opportunities in exports, as it make the exports more expensive. Thus we can’t make a certain judgement as it contains two potentially contrasting results.

    4. Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    I do not think that the United States can continue this budget deficit forever because this unbalanced budget balance will implode if the deficit gets larger and larger. This process is simply delaying the collapse because the process is so unnatural. Like the 2008 Economic Collapse due to Prime mortgage, or the 1928 crisis due to speculation, it can be seen that some unnatural systems are unsustainable and will someday fall.

  144. Anair2on 20 Nov 2012 at 4:34 pm

    @ Behiye
    Overall you had some very concise responses to the question. As for the first question I would not necessarily say that the imports would be more expensive in that they cost the same however relative to the US currency they may seem costlier than previously. You took a very interesting approach to question 2 as you took the approach that America may benefit however although this is true they will be running so much debt that problems will still arise. As for question 4 I definitely agree the US cannot prolong this too much.

  145. seun2on 20 Nov 2012 at 4:37 pm

    #Jessica Kenny
    Hey, I think for response#2, it is not just a difference in the nature of consumption, but also because of economic reasons. Saving by nature is one thing, but they do not release it because it makes Chinese trade less competitive. However, for #4, I think bringing in tax is a good solution to the problem. This will probably lead to higher tax rates, but in order to reduce the budget deficit, ,I think it is necessary.

  146. sybellevon 20 Nov 2012 at 11:16 pm

    • Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    The value of the US dollar would plummet to record lows. This would happen because the supply of US dollars would dramatically increase if China decided to change its foreign reserves to another currency. Additionally, as the Chinese demand for American currency would dramatically decline, the overall demand for the dollar would decline and result in depreciation.

    • Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    It is unlikely that China would do this for two main reasons. Firstly, China holds about $1 trillion in American debt currently (Bloomberg) and would run the risk of losing national wealth if the value of the dollar depreciated. Secondly, if the value of the dollar decreased dramatically, Chinese goods would become more expensive for American consumers. Demand for Chinese goods would fall in America, and this would be detrimental to Chinese manufacturers and the overall economy.

    • How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    American households are able to spend more as a result of China’s financing of the US government’s budget deficits; China’s purchases of American bonds keep the value of the dollar high and the price of imports cheap in America. Inadvertently, Americans suffer from this arrangement because the demand for US domestic products is relatively low compared to the demand for Chinese imports; this contributes to rising unemployment and greater dependency on China.

    • Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    I do not think it is possible for American to continue to finance its budget deficits through the continued sale of debt to foreigners forever. I believe that at some point, the American debt will be so high that Americans will want to take action. Additionally, as Americans become more dependent on China, relations between the two countries become increasingly strained. Eventually, if there is a major policy disagreement between the two countries, there could be far reaching economic consequences.

  147. sybellevon 20 Nov 2012 at 11:27 pm

    @seun2 :

    I agree with your response to the last question, and I liked your use of specific examples from history of unsustainable economic practices. I also thought your observation that American households suffer from the financing arrangement with China was on point.

    Though America is moving away from being a manufacturing nation, as more and more companies outsource their production, it seems quite obvious that the relationship with China is a central cause to rising unemployment rates in the United States. At some point, Americans that would normally be employed in manufacturing will have to adapt, and find a new career that is sustainable in the dynamic American economy, or reforms will have to be put into place so that more production can take place cost-effectively in the United States.

    However, another way that American households inadvertently suffer is that the more they buy into Chinese products, the more interconnected they become with China. We cannot have Wal-Mart and all the manufacturing jobs, too; it comes down to one or the other. Since economics is based on efficiency and self-interest, the majority of the time, people will choose a cheaper price instead of a boycott of a Chinese good for long term benefit. Because of this, it is hard to see an end to the interdependent and somewhat convoluted American relationship with China.

  148. Stefan Josephon 21 Nov 2012 at 2:37 am

    • Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?

    This would simply create the reverse effect of buying the American assets. As China buys the assets with no intention of selling, the demand for the American dollar is kept high and supply low. This is done to keep the dollar strong in relation to the RMB. The dumping of these assets would basically flood the market with an excess supply of US dollars and there would be a severe depreciation of the USD.

    • Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?

    China’s main goal is to keep American demand high for Chinese exports and to do so, they need to keep their currency weak and the USD strong to make it less expensive to American consumers. By depreciating the dollar, there would be less demand for Chinese exports as they will become more expensive shifting the demand.

    • How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?

    The buying of American government bonds will simply place US dollars back into the American economy and will allow American consumers to continue spending on Chinese exports due to tax rebates/government spending. However, this will simply place the American’s into more debt as it encourages their consumptive lifestyle and China will basically be able to determine the fate of the USD.

    • Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?

    Allowing foreigners to finance America’s budget deficits will not lead to a long term solution if their consumption patterns don’t change. The American’s receive foreign aid and simply throw it back at them by consuming foreign goods which will fuel their deficit in BofP leading to increased national debt.

  149. Stefan Josephon 21 Nov 2012 at 2:47 am

    @Anair2

    Hey Arjun, I like your response to the fourth question. I am wondering why Yr 2 Economics students are able to determine that foreign funding of America’s budget deficit will not lead to positive impacts, but America doesn’t? However, do you think China will ever stop funding their top consumer in the near future?

  150. jzhengon 21 Nov 2012 at 6:31 pm

    @ rthornton2

    In question 2, I believe that China is also unlikely to do so because the reserves of US dollar obtained from the positive balance of payment will lose its worth, therefore the wealth of China will be hugely affected.
    In question 3, the Americans will also becomes indebted if they are spending more than they earn.

  151. zphuaon 21 Nov 2012 at 10:31 pm

    • Many people in America are terrified that the Chinese might dump their dollar holdings. What would happen to the value of the US dollar if China decided to change its foreign reserves to another currency?
    If China wants to change its foreign reserves to another currency, they sell the large amounts of US assets they have for a foreign currency. This causes the supply of USD in increase by a great extent considering the huge amounts of foreign reserves China hold. This will cause a great drop in the value of USD, and hence US would have to spend much more money on imports, increasing the cost of production and hence causing serious inflation.
    • Why is it very unlikely that China will do this? In other words, how does the status quo benefit China as well as the US?
    It is very unlikely that China will dump all of its reserves. This is because China would then lose a lot of income from American exports, since China goods will become more unattractive to them. This will cause a decrease in China’s employment rate. Also, this will also be a lost of national wealth, as if the USD depreciates all of its national reserve would “evaporate”. The US would also not want those high inflation rates, hence both countries go well together.
    • How do American households benefit from China’s financing of the government’s budget deficits? In what way to they suffer from this arrangement?
    With a strong value of currency the price of a lot of things go down. The value of their assets go down. Interest rates will also go down, so that people would borrow more money. Tax rates could also be lower, since national debt is held by foreign lenders. They have a higher standard of living.
    However, they also suffer because of the decreased export, and might lead to a lower employment rate. Also, debts are debts, they have to be repaid. One day when China wants the US to pay back, the US would be in a state that they have to drop their live style of the higher standard of living that they previously had, and that would cause drastic changes to their lives.
    • Do you think America can continue to finance its budget deficits through the continued sale of debt to foreigners forever? Why or why not?
    I think that no, America won’t be able to live on foreign financed debt forever. This is because as they get more and more deficit, they would gradually get to a point where they have nothing left, and so no interest to repay other countries. When that time comes America would be in great trouble because they will have to find money to continue financing the lives of all Americans, and also there is no way they could cover that big financial hole in a short period of time.

  152. zphuaon 21 Nov 2012 at 10:38 pm

    @sybelle,
    Thanks for bringing up in question 1 that not only supply would increase, but also demand will decrease. However, I would like to add that one benefit of the American households is that they get to have a high standard of living. For your last question, I agree with you, but I am curious about when would the US think it is actually time to take action? Because that deficit gets greater by the day, and it is really tricky that China puts the money right back to US for them to continuing spending, creating even bigger deficit.

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