US adds 13% more US dollars to the world supply.

[JW Frogen]

The more money the US “creates” the more inflation they will have, right now they are worried about deflation so OK, but sooner or latter the markets are going to gallop and then they are going to have the opposite problem, and the middle class will suffer.

Having said that there is a Machiavellian argument that the US should wipe out Chinese debt through inflation, that this will reorient global economic power.

It is just a democracy cannot inflict that kind of suffering on it’s own people as China can.

Long may it be so.

[Postul8]

America's hegemonic future hangs on the largesse of the Chinese US$2t-plus surplus position. The Obama administration knows it too.

[JW Frogen]

I remember people saying this about the US and Japan in the 80s, and China does not even own anywhere near the real assets that Japan has purchased in the US, her debt is almost exclusively IOUs.

If the US defaulted, pulled her currency from trading (and other nations with less market power than the US have done this, the world does not need the markets of Argentina, it does the US) and then dealt with a year or two of roll coaster economic pain it could re-order the entire economic balance of power.

Still, it won’t. But the subtle threat it might, or re-write terms of trade and trade deficit finance should be a tool in the US diplomatic arsenal.

China needs US markets every bit as much as US needs Chinese finance of debt. Indeed, given China’s population levels, lack of resources and almost total reliance of manufacturing, a US default would be far more painful to China than it would the US.

Just the threat is a useful tool.