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Fish: Inflation hurts domestic US economy, and increase future borrowing cost
US don’t have the financial leverage to open China’s markets and they know it. Snow and Greenspan will come back empty-handed, and will get what China wants to give. They will try to spin it for political leverage in the US, but let’s be clear. The US economy cannot handle more rapid economic changes by China. In July, with only a 2% revalue, that was enough to push domestic interest rates up enough to cool down the real estate market. This cool off was expected in many interest sensitive markets. |
Snow’s statement, “China needs to get people to spend more and save less” is downright laughable if that was a true statement. While China has increased domestic spending and consumer spending, one of its cultural identities is its ability to save. I’m afraid Snow is ignorant of that.
China will adopt institutional reforms based on what’s good for China, not what’s good for foreign corporations. The restrictions on ownership, especially in financial assets, are valid since China wants more control macro-economically. If the situation was reversed, I’m sure other countries would want likewise.
Fish, your inflation idea is plain silly. Inflating away the debt would be an idea if it were a one-time occurrence. To pay back huge debts with deflated dollars is like robbing Peter to pay Paul, when a needy borrower like US still needs to borrow money in the future.
Inflation is harmful to the US economy as it isn’t something US can sustain continuously without damage to other sectors of its economy. History is filling with examples of economies that tried to use inflation that way, and failed miserably. Examples include Germany before WW1, and Czechoslovakia most recently.
Inflation would also increase the cost of future borrowings. Unless you think US will miraculously balance its budget, and run surpluses from now on, it will need to borrow future funds, mostly likely from China et al, and that will be at even higher cost. Right now, US can still do this, but eventually, the debt coverage ratio will be such that its creditworthiness will no longer attract, but repel foreign monies. And if Iran is successful in implementing their oil bourse, don’t be surprised that other countries will use Iran’s bourse, or implement their own version to bypass petrodollars. Without the support from petrodollars, there is legitimate questions about whether US can sustain itself in an inflationary economy, and what further damage that will do to the financial fundamentals of the US. If US allow the dollar to weaken more, the next real question is how much longer can it legitimately be a world reserve currency, as the Central bankers around the world are watching.
Rather than use these failed strategies from history, US will be well served to correct the economic problems by addressing these issues at the root, instead of trying to manipulate the currencies for economic symptom improvement. But I suspect US will go for economic symptom improvement, instead of working to address the roots of its economic problems.