Friday, January 25, 2008

China: Reduce Inflation by Dumping Dollars?

The Chinese government is worried about inflation in its overheated economy. I noticed someone's remark, the other day, that China would welcome a slowdown in the U.S., because that would reduce American demand for Chinese goods, giving the Chinese authorities a better chance to stabilize their economy. China is a heavy subsidizer of the U.S. government's budget deficits. If China invested less in American government bonds, the U.S. government would have to offer higher rates of interest in order to attract lenders who would continue to subsidize its deficits. It seems like those higher interest rates would compete with other would-be borrowers (e.g., American corporations). Also, higher borrowing costs would increase pressure on the U.S. government to lower its spending. In both of those ways, a Chinese departure from the dollar would seemingly facilitate the sort of U.S. economic slowdown that China is said to prefer at this point. I don't know if I have all those things right, and I also don't know if those steps will actually occur. A separate point is simply that it is now conceivable that, as one would expect, a big lender (e.g., China) eventually becomes able to manipulate the options and circumstances of its borrower (e.g., the U.S.). Such things have happened in the past -- with e.g., the Arab oil embargo of 1973-74. But the ability to influence the rate of interest that the U.S. government must pay nonetheless does seem to be a different kind of event.