China's dollar trap:
China's official foreign exchange manager is still buying record amounts of US government bonds, despite Beijing's increasingly vocal fear of a dollar collapse, according to officials and analysts.
In recent months, senior Chinese officials, including Premier Wen Jiabao, have repeatedly signalled their concern that US policies could lead to a collapse in the dollar and global inflation.
But Chinese and western officials in Beijing say China is caught in a "dollar trap" and has little choice but to keep pouring the bulk of its growing reserves into the US Treasury, which remains the only market big enough and liquid enough to support its huge purchases.
And therein lies the danger of an export-led economy -- especially when your exports depend on the health of a single, large buyer. Doubly especially when your exports depend on the sense of that single, large buyer.
Japan got knocked around the same way, back in the '80s and '90s. They loaned us money (by buying our debt in great big numbers), with the expectation that we'd invest in education and infrastructure. That way, we'd keep growing enough to keep buying their stuff. Instead, we devalued the dollar so that we could keep buying their stuff. And Japan, Inc found itself on the wrong end of a very royal screwing.
But what was Japan to do? Something like one-fifth of their national economy was (is!) dedicated to serving American consumers.
Now it's China's turn.
Article printed from VodkaPundit: http://pjmedia.com/vodkapundit
URL to article: http://pjmedia.com/vodkapundit/2009/5/26/devaluation-blues