Great post ledger.

Also, to clear up a few things from earlier posts:

The Yuan is pegged to the dollar. One reason to sell some of their T-bonds/bills/notes would be if they thought the dollar was going to continue to depreciate. With what’s happening in Europe, that actually doesn’t leave many options. Believe it or not, the dollar is once again being seen as a reserve currency. The Yen is the only other currency with any cache in the current stage of the crisis.

To confirm early posts, selling all at once would be murder/suicide, although the murder part would be less certain. The suicide comes from the wiping out of trade w/ your biggest trading partner, not to mention that you can’t just sell 2T of bonds at once, so you’d decimate the price on the way down.

If a bond holder wants out, they don’t sell to the US gov’t unless the gov’t happens to be buying bonds at the time (e.g. there’s a surplus). The bonds are bought by another investor.

If China repatriated 2T dollars it would definitely be inflationary, which as ledger points out would be problematic.

If the US starts printing money to re-inflate its way out of this debt crisis (it’s already started in small explicit ways and some larger though not yet massive implicit ways) then China stays pegged to the currency that allows them to sell the most (since we buy the most of any country) and also gives them a natural hedge to oil prices. Of course if they hold onto bonds (especially longer term bonds) while the inflation is happening, they would lose money to inflation. If China was worried about this you’d see them buying more short-term bonds and T-bills. Last week there were some T-bill trades that *literally* resulted in the buyer *paying* a small amount for the gov’t to hold their cash. That’s how panicked some traders/investors were. I’d like to know what the maturity/duration profile was like for China’s portfolio.

Something in this post is probably wrong since I typed in a hurry (gotta get to work), so reader beware (and feel free to correct).

I could keep going. They say it’s a curse: “May you live in interesting times.”