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China has bought a lot of U.S. debt. Along with Japan, they are one of the top holders of U.S. treasury bonds.
Recently, however, it seems as if they have been selling off some of their treasuries. Record amounts, as a matter of fact which, as a guy who buys a few bearings from China, has me a little nervous.
I am a big fan of Mike Maloney and his video series The Hidden Secrets of Money. However, that does not mean I agree with everything he says. He believes that we are heading into a deflationary depression that will cause the Federal Reserve to print money and that at first people like the Baby Boomers will hoard this money (low money velocity) until the economy starts to recover. When the first signs of a recovery appear and the baby boomers feel like they have saved up enough for retirement, then all of this money will flow into the economy causing massive inflation, possibly hyper-inflation.
It is a sound theory and he gives the example of Germany printing Deutsche Marks during the first world war. During the war, people hoarded money because of all of the economic uncertainty that wars bring. After the war, things started getting back to normal and all of these Marks flooded into the economy causing the first German hyper-inflation.
However, that is not how I believe it is going to go down in the U.S. for at least two reasons I can think of. The first reason is that all of the massive amounts of money that have been printed over the last decade have flowed largely into the hands of the 1%. And this has already caused inflation in the types of things that the 1% buy--stocks, bonds, real estate, etc. This has made the rich richer and the elites safer by giving the Baby Boomers a false sense of security in their retirement funds. But since this money hasn't "trickled down" to those in the middle and lower classes, it has not and will not cause inflation in the things that they buy like toothpaste and television sets.
What will cause inflation--and suddenly, rather than gradually--is the Chinese, the Saudis and other nations of the world deciding they have enough dollars. If they ever abandoned the dollar as the world's reserve currency--and one could argue that any currency backed by a nation 20 trillion dollars in debt should be abandoned--it will bring inflation to the U.S. overnight.
For example, if I someday want to buy 2,000 GW208PPB5 disc harrow bearings and the factory says it will only take RMB for the bearings, then I will have to do something or sell something to earn those RMBs. Obviously, I could sell dollars to earn those RMBs but if every other importer in the U.S. is doing the same thing--that is a lot of people selling dollars and buying RMB. This will, of course, drive up the price of the RMB in dollar terms and make the bearings I buy much more expensive.
Alternatively, the US could sell things we produce rather than dollars that we print to gain the RMB necessary to buy all that stuff we want from China. Our Trade deficit with China was aobut $365 dollars. That would probably be close to the value of every single car produced in this country--which would do what to the price of cars here?
Basically, if the U.S. dollar stopped being accepted as the world's reserve currency, we would immediately descend to the status of one of those "Third World" countries that the IMF is always telling to cut spending and produce for export. Virtually everything we would produce would be marked for export to reduce our trade defiicit and that would cause huge inlfation in this country, even if the Fed never printed a single extra dollar.
My GW208PPB5s would become so expensive, people will probably just bring back the horse and the plow.