Thursday, November 5, 2009
China and USA locked in financial combat
"It is worth noting that in order for USA to keep the debt at 100% of GDP while still increasing it at the 2010 rate of 9% per year, it is necessary to grow the GDP at 9% per year in current dollar terms. This means that if the GDP grows at 3% per year in real terms, prices have to inflate at 6% or else the debt will grow as a fraction of GDP." - What can China do? "a) Do nothing; b) Change the degree of linkage of the yuan and the dollar c) Buy gold instead of dollars d) Go someplace else, purchasing the debt of other countries. â€“ Which leads Ross to conclude: China cannot solve its balance of trade surplus by purchasing debt instruments in quantities much out of line with the surpluses themselves. The only sure way China can move away from US debt purchases is to .... "