End of cheap money

July 21, 2005 6:37 AM

China ends (sort of) Yuan dollar peg. The People's Bank of China announced that it has formally ended its peg of the Yuan against the US dollar. Instead, it will be fixed within a narrow band against a basket of currencies (PBC statement here). Interestingly, the PBC declined to provide details of this new scheme, including which currencies are in the new basket. A slow move away from being tied to the pathological US economy? What are the implications for the US's ability to maintain enormous trade and budget deficits? Already, this has relaxed the pressure on other Asian economies to keep their currencies low (by buying US dollars and securities). Congressmen may have been raging against "unfair Chinese trading practices", but we may yet get nostalgic for the days when the world financed the US's prolifigate ways.
posted by bumpkin (64 comments total)

It seems that Greenspan knew about this when he spoke yesterday and suggested that the rate increase cycle has not ended.

If Chinese imports become more expensive because of this, then the basket of goods we get from Wal-Mart could get a lot more expensive. This inflation fear probably prompted Greenspan to indicate his readiness to raise interest rates.

This seems good for US stocks (at least in the short term). We were getting awfully close to having an inverted yield curve (which usually precedes a stock correction) because the Federal Reserve kept raising rates while Chinese purchases of US Treasuries were holding the yields on long term bonds down. If demand for the long term bonds decreases, their rates will go up, and the Fed will have more leeway to raise short term rates without inverting the yield curve.

The big risk, in my opinion, is that if the Chinese take more steps to float the yuan, long term rates could go up a lot. That could take the air out of the housing bubble because of the increase in mortgage rates.

Even if housing prices fall, though, it seems that financially stable households would benefit since they should be able to continue making their payments on low fixed rate debt while watching inflation forgive some of the debt. Or at least this is what I hope. :)
posted by landtuna at 6:57 AM on July 21, 2005

Didn't the US Tresury want China to unpeg?
posted by PenDevil at 6:58 AM on July 21, 2005

This means something...though I'm not sure yet...searching for the relavent CRS report...

China's currency peg: implications for the U.S. and Chinese economies / Wayne M. Morrison, Marc Labonte -- Congressional Research Service, The Library of Congress, 2004. 6p. (CRS report for Congress- RS21625) 3/30/2004
U.S. - COMMERCE - CHINA (J-130)
posted by rzklkng at 6:59 AM on July 21, 2005

I seem to remember reading that this was some U.S. economist's nightmare scenario. Economics was my worst subject in college though.
posted by Foosnark at 6:59 AM on July 21, 2005

So US citizens would have to tighten belts, and our cheap lifestyle isn't subsidized as much on cheap prison labor, or labor under similar conditions. Why are these bad things?
posted by Rothko at 7:01 AM on July 21, 2005

Thar be Link here. Direct download of summary (PDF) here as well as full report here.
posted by rzklkng at 7:06 AM on July 21, 2005

Without the US playing so much a neutral middle man role, it makes sense if a controlled economy is going to peg its level to some imaginary middle man instead. I was surprised (shouldn't have been) that the Unocal deal ended up favoring a US buyer for less money. Whatever happened to the value of a dollar? Heh.
posted by nervousfritz at 7:26 AM on July 21, 2005

Even if housing prices fall, though, it seems that financially stable households would benefit since they should be able to continue making their payments on low fixed rate debt while watching inflation forgive some of the debt.

And if everyone was getting fixed-rate mortgages, this would be totally true, but the sad fact is that lots of home buyers are getting ARMs, which is going to leave them well and truly fucked if we see a large rise in interest rates.
posted by bshort at 7:27 AM on July 21, 2005

pathological US economy

not sure what that means
posted by The Jesse Helms at 7:29 AM on July 21, 2005

Ugh, this is not good. I know a lot of Lou-Dobbs type america-firsters wanted to see this end so that the chinese would have an easier time importing our stuff (improving the ability for normal americans to get factory jobs. yay.) But this is going to decline the standard of living for middle class americans, which are most of us, I think.

Thankfuly only about 25% of our GDP is even cycled outside the country, so our economy won't be totaly devistated.

Actualy, what's intresting about the US economy is the "25% rule". By most indicators, you'd think the US has 25% of the worlds population. our GDP is 25% of the worlds GDP, we put out 25% of the world's polution, we even have 25% of the worlds prisoners. Yet, we have only 5% of the worlds population.

Not really relevant, I just wanted to share :)
posted by delmoi at 7:31 AM on July 21, 2005 [1 favorite]

pathological US economy. . .not sure what that means

I think I saw two news items in the last week that had HP and Kodak laying off 30,000 altogether. The economy will have to create many burger flipping jobs to employ all those people.
posted by nervousfritz at 7:32 AM on July 21, 2005

One other thing this can lead to is more apparent wealth for China relative to the US. We want them to buy our goods and services with this wealth. However, do we want them to buy our companies with it?
posted by caddis at 7:33 AM on July 21, 2005

There's nothing bad about this. This is simply evolution. Other Asian countries can already command lower prices, and soon Africa will be next. I have a feeling after Africa all our manual labor will be automated.
posted by geoff. at 7:38 AM on July 21, 2005

And if everyone was getting fixed-rate mortgages, this would be totally true, but the sad fact is that lots of home buyers are getting ARMs, which is going to leave them well and truly fucked if we see a large rise in interest rates.

As they deserve, IMO. Too many people buying more house than they can afford is what has priced me out of the housing market entirely.
posted by eas98 at 7:49 AM on July 21, 2005

Wait, no matter what, any change to the status quo introduces instability, right? And the likely (short-term) effect of this will be to make the import of Chinese goods more expensive (inflation?) I guess it could also make US exports to China less expensive, but what exactly do we export to China?
posted by rzklkng at 7:52 AM on July 21, 2005

but what exactly do we export to China?

Education for one thing. A lot of Chinese people come here for a college degree. Another thing may be B2B, for example, maybe Boeing's looking to sell a fleet of jets, or some plumbing company is looking to sell thousands of urinals for building construction there.
posted by nervousfritz at 7:59 AM on July 21, 2005

if the Chinese take more steps to float the yuan, long term rates could go up a lot.

Everyone is going to expect them to take more steps (which they said they'll do, anyway). So long term rates will go up somewhat just in anticipation of the real change, now that it's certain to be coming soon. 10yr treasury yield is already up by 10 over yesterday, biggest move in months. You'll notice that it was already moving up for the past few days on average... I guess someone had advance notice.

this website leans left.

Nothing in the FPP was "left". The only potentially convroversial thing in there is the characterization of the US economy as "pathological". That has nothing to do with traditional left/right politics, and is a matter of some debate among economists of all political persuasions.
posted by sfenders at 8:00 AM on July 21, 2005

This is actually long overdue. The effect of the weak dollar on the Chinese economy has not been entirely positive. There are, you know, other countries in the world that China trades with.
posted by three blind mice at 8:05 AM on July 21, 2005

Furthering the need for Bush to start talking about who is going to replace Greenspan and why that's more important than Roberts.
posted by rzklkng at 8:06 AM on July 21, 2005

This is something the US has been calling for for a long time.
posted by TheophileEscargot at 8:07 AM on July 21, 2005

dios,
Are you saying that US spending isn't profligate (unrestrained by convention or morality)?
Or that the rest of the world isn't financing our lifestyle?
Inquiring minds want to know
posted by bashos_frog at 8:10 AM on July 21, 2005

We only provide 7.7% of China's total imports.
posted by rzklkng at 8:13 AM on July 21, 2005

Furthering the need for Bush to start talking about who is going to replace Greenspan and why that's more important than Roberts.

I get the feeling that it doesn't really matter much who is chair of the Fed, frankly. When Greenspan was in the seat, there wasn't much he could do about the overheated days of the dot-com era, despite his efforts to raise interest rates and so forth. Capitalist economies chug and stall on their own steam, and what government officials do for the most part can't affect economies in the short-term, historically.

Jobs come and go, and barring unforseen events, Roberts would likely be in power much longer than any given Fed chairman. Roberts' rulings would have a greater long-term influence on the day-to-day lives of Americans, with respect to civil liberties, voting and property rights, and so forth.
posted by Rothko at 8:13 AM on July 21, 2005

You guys are far too rational. Me, I'm loving me some bubble burstin'! It's about damn time. Let me see some panic! Maybe there'll soon be a house I can afford outside of the suburbs of Fargo.

You gotta figure that, in a country with debt up to its eyeballs, a president who spends like a crack whore with a credit card, and a pretty much decimated manufacturing base, we're in for a ride. Now that's editorializin'.
posted by fungible at 8:22 AM on July 21, 2005

Capitalist economies chug and stall on their own steam, and what government officials do for the most part can't affect economies in the short-term, historically.

I disagree look at historically the economic cycle and look how it generally flattens out due to modern policies. We have lower highs, and higher lows. We don't hit that great boom time followed by devestating depression.
posted by geoff. at 8:31 AM on July 21, 2005

Are you saying that US spending isn't profligate (unrestrained by convention or morality)? Or that the rest of the world isn't financing our lifestyle?

bashos_frog according to the CBO US deficit spending in 2004 was 3.5% of GDP. By comparison, Italy was at 3.1%, Germany 3.9%, France 3.7%, Greece 6.1%, Portugal 6.8%.

US deficit spending is not out of line with other countries whose convention and morality is markedly different. Not that it this is a good thing, but the US is not the only one living beyond its annual means.
posted by three blind mice at 8:37 AM on July 21, 2005

I disagree look at historically the economic cycle and look how it generally flattens out due to modern policies. We have lower highs, and higher lows. We don't hit that great boom time followed by devestating depression

Our economy is highly globalized. The reason the US doesn't feel those devestating depressions (yet) is because our lifestyle is subsidized by ever-cheaper products made somewhere else and ever-cheaper (stagnant min. wage wrt. inflation) service labor domestically. The greater pains of poverty are felt where the media doesn't go.

Further, we have a consumer-driven economy that survives largely on giving everyone access to easy credit, so again we don't feel things at home because for the most part we are able to throw some other country's bank's money at the problem, irregardless of our employment or savings situation.

Thirdly, devaluation of the US dollar as a policy rule got rolling with Reagan and helps keep our escalating consumer behavior and debt payments manageable.

These are long-sighted policies that have shaped our economy for the long term and will continue to do so, until these countries call in the tab and we're bankrupt. The best thing we can do strategically for national security is borrow as much as we can from our neighbors — their well-being is dependent on propping up our economy, so that we can keep paying our loan maintenance.

In the short-term, currency fluctuations from yuan unpegging won't change much about how we do business in these respects, and no Fed chairman can do much to change decades of habit.
posted by Rothko at 8:49 AM on July 21, 2005

In fact, the last sentence in MattD's comment in this AskMe thread is perhaps the most prescient comment so far. Walmart probably has much more influence on the outcome of this revaluation than anything the Bush administration could do.
posted by Rothko at 9:00 AM on July 21, 2005

Thirdly, devaluation of the US dollar as a policy rule got rolling with Reagan and helps keep our escalating consumer behavior and debt payments manageable.

Debauchery of the currency goes back at least to the bible. In the US it at least goes back to FDR, who outlawed private gold ownership, or to Nixon, who killed Bretton woods.
posted by Kwantsar at 9:01 AM on July 21, 2005

It's been a semester since I-Econ, but as I recall, the peg was going to hurt China in the longterm anyways, so I'm not surprised they drop it. By keeping a peg, they would inevitably lose control of the money supply -when you keep a peg, you create a huge secondary market where a new "real" market rate becomes established. So essentially, you have less control over your money's value because the official rate doesn't mean anything as the secondary market establishes "real" exchange rates.

So as for this being "an economist's nightmare", as an economist in training, that's not true. It's not necessarily going to make prices at Wal-Mart rise precipitously (raising CPI/inflation). China's dropping the peg is more of a good thing for the United States in the longterm. Speaking as an economist in training, I think the dropping of the peg is a good thing. It will cause some shocks to the world economy, but there is nothing for certain that says these will be major or horribly painful, and the longterm benefits would be a good thing for almost eveyone involved.

Of course, economically speaking, the ones who get hurt the most also squeal the loudest, so I'd expect some complaints from those importers who will feel the pain.
posted by Drylnn at 9:03 AM on July 21, 2005

I know the "mainstream" economic thought says that the Fed's intervention in the money supply is stabilizing, but it looks to this interested layperson like it exacerbated the problems in the 90's and since.

It seems to me like Greenspan just does whatever the sitting president wants, regardless of the longer-term effects of his actions.

I don't think we've stabilized the global economy as a whole, we've just temporarily pushed the instability onto other countries' shoulders.
posted by sonofsamiam at 9:08 AM on July 21, 2005

When Greenspan was in the seat, there wasn't much he could do about the overheated days of the dot-com era

As the chairman of the Fed, it's not his job to stop the stock market from losing value or to keep it gaining value. Those things happen. His job is to control the money supply (to keep things like inflation from destroying the economy) and to keep the banking system running so that we don't have a recession turn into a depression. Recessions happen... you can't stop them totally. When recessions happen, that's usually when you see stock market problems.

Strictly speaking, despite our recent memory, the stock market problem at the end of the dot-coms wasn't all that bad. In fact, one could say that in part because of the Fed, it didn't become a major financial crisis. 1987 was a lot worse than the end of the dot-com era, it's just that most of us have much more vivid memories of the later one.
posted by Drylnn at 9:08 AM on July 21, 2005

US deficit spending is not out of line with other countries

Government spending is just one part of the equation. Consumer debt is about $2 trillion, Fannie Mae and Freddie Mac each hold another $1 trillion or so in mortgages that will hopefully be paid back. Provided people don't start defaulting on their home loans/student loans/car loans/boat loans/medical payment loans/etc.
posted by Civil_Disobedient at 9:08 AM on July 21, 2005

the Fed's intervention in the money supply is stabilizing

Well, it's suppossed to be, because that's its job. Explain to me how the Fed exacerbated the problems in the 90s.

A legitimate complaint can be made about the Fed's actions leading to the Great Depression. Had the Fed played its role as the lender of last resort, the Great Depression most likely would have been a mild recession. Instead, they contracted money supply repeatedly, leading to massive bank failures.

By contrast, the Fed learned a lot from the Depression and helped ensure that 1987 (which was bad) and the late 90s didn't become much worse, up to Depressions. In 1987, by encouraging banks to provide loans to companies that needed it by ensuring they would lend all that was needed at the discount rate, the stock market didn't collapse. In the late 90s, they made similar actions, so while some companies squealed loudly due to stock losses, we didn't see a massive collapse of the banking system nor did we see the largest companies go out of business.

The Fed's job is not to stop recessions... this is a popular misconception. Recessions just happen in a somewhat cyclical way. The Fed can only help encourage long business cycles through its actions.
posted by Drylnn at 9:16 AM on July 21, 2005

Well, it's suppossed to be, because that's its job. Explain to me how the Fed exacerbated the problems in the 90s.

Are you serious, DryInn? You're a budding economist, and you need someone to explain to you how the Fed might have exacerbated the problems in the 1990s?

You needn't agree with Austrian Economics to agree that it provides a pretty good framework to evaluate the current situation and identify the last seven or eight years as a period of blowing bubbles.
posted by Kwantsar at 9:26 AM on July 21, 2005

you need someone to explain to you how the Fed might have exacerbated the problems in the 1990s?

By the time the Fed's actions occurred, the problem was already in place, and those actions didn't make much of a difference. The Fed couldn't do much to change the outcome, just the timetable. Stock prices would have continued to rise and the crash would have occurred. The problem with maintaining a business cycle is that you don't know for sure if something is a bubble or not until it bursts.

By contrast, they did a lot to ensure that it wasn't a lot worse. I'd call their actions a mixed bag. I worded it badly, but what I wanted out of you was how their actions universally made it worse without any actions to help improve the situation, which you seemed to imply. They made bad actions, they made good actions, and the situation would have happened to the degree it did. An excellent argument can be made that the 90s could have been MUCH MUCH worse without the Fed's actions to stabilize the banking system as the recession was in gear

You needn't agree with Austrian Economics

I'm not saying I do or don't, but most modern economists AREN'T big believers in Austrian Economics. To most, it's an interesting set of side theory that shouldn't be the main focus (although it does have its devoted core, like at Princeton, etc).

I agree this is a period of bubbles. But the discussion is moving away from "Is the Chinese peg a good or bad thing for us and the world economy". I believe it's a good thing, even if there are shocks. No longer can we expect a pegged exch. rate to help hide the problems that are going on and maybe we can look to *really* solving them for once.
posted by Drylnn at 9:49 AM on July 21, 2005

By the time the Fed's actions occurred

Should have read "By the time most of the Fed's actions occurred"
posted by Drylnn at 9:52 AM on July 21, 2005

And I believe it's a good thing should have been I believe it's a good thing that the peg is going away.

This is what happens when I write while working on other stuff at the same time.
posted by Drylnn at 9:53 AM on July 21, 2005

Just one more comment Kwantsar, just because its funny. I love how your google search's first link goes to an article called: "The Fed Didn't Cause the Stock Market Bubble" :)

I understand what you're trying to say, just was amusing to read that.
posted by Drylnn at 10:10 AM on July 21, 2005

Dios: Your post was certainly thoughtful and decidedly un-kneejerk...NOT!

The FPP is about economics and not politics. The outcome I thought was best summed up by landtuna's first post.

All of this aside China needed to do this just as much as the US needed them to. It is not very healthy for a growing economy such as China's to maintain such an artificial cap on it's currency's value.

Now I will editorialize
Yes prices will rise in the US as a result...and they should. Walmart prices are only sustainable via the lowest of the low wages. They've been artifically supported by pegging the Yuan to the dollar and not reflecting real economic growth in China vs. economic stagnation in the US. On the plus side of things North American and EU goods will become more price competitive.
posted by aaronscool at 10:35 AM on July 21, 2005

I'm getting in a little late on this thread... but if China unpegs, and consumer goods prices go up, and inflation sets in, this means LESS buying power for Americans, so wouldn't Greenspan LOWER interest rates to stimulate the economy? Where's the missing puzzle piece?
posted by rolypolyman at 10:58 AM on July 21, 2005

rolypolyman,

Lower interest rates increase the money supply by making it easier for everyone to borrow money. Having more money doesn't necessarily mean more buying power, however.

Inflation is what happens when the money supply increases too fast, and, as a result, the dollars that you've saved become worth less. By raising interest rates, the Fed can combat inflation by making dollars more scarce.

So lowering interest rates, while possibly stimulating business investment because of cheaper loans, hurts people who save money because it increases the money supply (causing inflation). (Not to mention that lower rates make it harder for savers to get a good non-stock-market rate of return on their cash.)
posted by landtuna at 11:07 AM on July 21, 2005

rolypolyman, the Fed has always used higher interest rates as a way to curb inflation. On the surface, it may seem a bit counter-intuitive but as inflation starts to become a concern, rates will increase.
posted by mania at 11:10 AM on July 21, 2005

what landtuna said...
posted by mania at 11:11 AM on July 21, 2005

Thanks much for the lesson.. appreciate it!
posted by rolypolyman at 11:26 AM on July 21, 2005

we may yet get nostalgic for the days when the world financed the US's prolifigate ways.

I'm one of these bleeding hearts that actually looks forward to the day the oil runs out and in the same sort of vein, no, I don't think I'll feel nostalgic when this economic reckoning comes. It's long past time to get real.
posted by scarabic at 12:02 PM on July 21, 2005

Ok, for the people freaking out about how this will drive up our prices and such...

WHY would China allow this to happen? Think about it. The sole reason their economy is skyrocketing is because of all the corrupt evil capitalists investing in their cheap slave labor and artificially-inflated currency. (only being somewhat sarcastic...) If they allow the Yuan to become more valuable, this risks chasing Wal-Mart and company away, and thus undoing all the progress they've achieved. They could very easily price themselves out of the market.

The only rational course for China is to change the value VERY slowly. Which means little to no direct change to the prices we pay for goods.

At least as I see it, but IINAE.
posted by InnocentBystander at 12:31 PM on July 21, 2005

three blind mice,
What is the GDP of Italy? A bit (10x) less than the US, I would think.

By analogy, there would be nothing more profligate about Bill Gates tipping a waitress $600,000.00 than there would be about me tipping her $2.00?

(Not to mention C_D's point about consumer debt)
posted by bashos_frog at 1:18 PM on July 21, 2005

fungible writes "a pretty much decimated manufacturing base,"

America has a really problem with cutting off it's nose to spite it face. The latest live cow import ban being the last of a long line of examples. When the whole mad cow thing broke Canada didn't have enough (not even close) meat cutting plants to process the live beef. Thanks to the Americans we'll be shipping a lot more cut beef across the border as we've been forced to add slaughter facilities north of the border that won't close down just because the border is now open (if it stays that way).
posted by Mitheral at 1:20 PM on July 21, 2005

I'm looking forward to the day water runs out.
posted by mullingitover at 1:27 PM on July 21, 2005

To InnocentBystander:

Why would China do this? Because part of signing up to the WTO means you need to have free and fair trading practices. Fixing your currently at a value lower that what it may be if freely traded doesn't particularly warm the hearts of all the free trade capitalists in the world.

While they do risk the potential of their exports declining as a result their economy is doing exceptionally well at the moment and can probably stand to increase prices a bit. FWIW this is the usual pattern that countries climb the industrialization ladder and if they are ever to become a 1st world power they will not be able to supply cheap labor and inexpensive products at the same time.
posted by aaronscool at 1:27 PM on July 21, 2005

I'm looking forward to the day water runs out.

While we are on that subject I am constantly in awe that people don't really realize that the fundamental beliefs of Capitalism require an ever increasing consumption of resources to sustain itself as a system.
posted by aaronscool at 1:31 PM on July 21, 2005

aaronscool: Economies can grow with a decrease in resource consumption, so long as they utilize the resources they have more efficiently.
posted by mr_roboto at 1:41 PM on July 21, 2005

the fundamental beliefs of Capitalism require an ever increasing consumption of resources to sustain itself as a system.

Not free-trade capitalism in general, but the modern pseudo-capitalism composed primarily of heavily publically subsidized (by one mechanism or another) industries, yes.
posted by sonofsamiam at 1:43 PM on July 21, 2005

mr_roboto, I know of no way Capitalism can continue without using resources which are finite currently. Yes we can reduce the rate at which we use resources. Yes things like efficiency and productivity and increase revenue and turn a profit as well, but which companies currently exist that have a net zero resource consumption?

Now before all the folks start shouting chicken little at me I'm not saying we're doomed or that the world economy will collapse any time soon. But I do wonder just how long we can sustain our current system of economics and whether we will be able to make changes and adjustments without first facing some catastrophe.
posted by aaronscool at 1:54 PM on July 21, 2005

aaronscool

Oh yes. Their Yuan polices have obviously been driving investors away from their country in droves.

...

I'm not saying they won't increase things a *bit*. But never so much that it'll affect us (or any of the countries investing heavily in them) in any massive way. That would scare everyone away. And there's no shortage of asian countries offering slave-rate labor for corporations to go to.

That's my point in its entirety. That people who think this is going to somehow cause a massive spike in US prices are way off base.
posted by InnocentBystander at 2:00 PM on July 21, 2005

Well, it is only 2% after all. The euro/dollar probably changes that much in an average month.
posted by sfenders at 2:11 PM on July 21, 2005

Inflation is the only way out. Hopefully not as bad as the 80s but nonetheless....

It would negate these gigantic mortgage payments people are making in their overvalued homes. Remember that the three main factor in the housing boom are the price of land, and shortages of both materials (plywood, etc) as well as labor (demand increases, workers demand more pay to price out the poorer buyers until they have just enough work to sustain them). Its quite possible that if the supply of labor and materials caught up, prices would go down.

Personally, I'd rather have inflation so that it would negate my big house payment (on a 30-yr fixed mortgage payment). As my wage would (hopefully) increase with inflation, my payment would proceed to become a smaller percentage of income. I went from being able to afford a 2800 sq ft house(1) to a 1700 sq ft house(2) (same builder, neighborhood, etc) in an 18 month period, despite my income increasing by 20%.

(1): April 2003, ASP in my city on a 2800 sq ft home was $265,000.
(2): October 2004: ASP in my city on a 1700 sq ft home was $370,000.

Inflation would also reduce the effective amount of debt americans have managed to rack up in the past ~20 years. $10,000 is a lot now, but after 8-10 years of 7.5% inflation would be roughly half that.
posted by SirOmega at 3:34 PM on July 21, 2005

I'm looking forward to the day water runs out.


Hilarious mullingitover!
posted by batou_ at 3:37 PM on July 21, 2005

Inflation is the only way out.

pfft. If America wants enough inflation to get out of its debts to any meaningful degree, it's going to have to print up paper money and dump it out of helicopters into the streets. Which I expect they probably will start doing any day now. I'll be glad I thought to bury all those gold coins in my back yard. If only I could remember where exactly that was among those 60 acres of swamp. Whether your wage would increase with inflation would presumably depend on whether you happened to be in the right place at the right time when they start giving away all that money, so I recommend hanging around rich people and helicopter pilots. In the end though, once that all played out, you might not have any debt, but you also wouldn't have any money that's worth anything. Hmm. Maybe it's time to start learning some kind of productive trade that will be worth something in the post-dollar economy, like welding, or farming, or butlering. Nah, leveraged speculation in the stock market is still more fun. My options contracts are up 25% today, and if you want to call that inflation, I'll drink to that.
posted by sfenders at 4:06 PM on July 21, 2005

Inflation is the only way out.

That would be a monumentally bad decision, if it were made on purpose. All foriegn investments would suddenly be worth less than they before, which would cause foriegn banks to:

1. Stop lending to us to sustain our debt.
2. Dump our T-Bills like a bad case of Montezuma's revenge.

...which would exaserbate the problem significantly.
posted by Civil_Disobedient at 5:02 PM on July 21, 2005

They have Inflation in Zimbabwe. It's probably safe to guess that's not one of the currencies in China's "basket".
posted by sfenders at 6:31 AM on July 22, 2005

Big Picture has the best comment:

The Peoples Bank of China (PBOC) announced today that they are effectively taking over the interest rate responsibilities from the US Federal Reserve. The Chinese Central Bankers announced that, effective immediately, they are beginning a series of incremental rate hikes in the United States. The first rate hike was for 10 basis points on the 30 year.

The Fed’s inability to significantly impact long rates anymore is what led to the outsourcing.
posted by sfenders at 7:56 AM on July 22, 2005

So US citizens would have to tighten belts, and our cheap lifestyle isn't subsidized as much on cheap prison labor, or labor under similar conditions. Why are these bad things?

Well, read what you just said. People would be trying to tighten their belts at the same time labor costs (and therefore the costs of all products made with labor) are going up. Tightening your belt is hard enough when prices are stable, if prices are going up at the same time you can find yourself suffocated.
posted by kindall at 8:59 AM on July 22, 2005