[badguy2000]

well, yesterday,China's foreign exchange reserves exceeded US $2 trillion.

it is expected to rocket to 2.2 trillion USD by the end of 2008.

[anniegetyourgun]

Gives new meaning to “owned.”

[screaminsunshine]

Chump change soon with Obamaflation.

[PGR88]

That should be just what we need to bail out everyone in the USA!

China will be taking our country now...

[econjack]

From what I've seen thus far, I sure hope somebody forces Obama to sit through ECON 101 sometime soon because he is absolutely clueless how the economy works. Given that, his economic advisers are going to be critical appointments as he doesn't know enough about economics to formulate policy. A bad omen was that he used Franklin Raines as his chief economic adviser during the campaign...you know, the guy who was the head of Fannie Mae, cooked the books, paid himself $90 million in bonuses, got caught despite the best efforts by Maxine Waters (et al), paid a $1 million fine (still sounds like a sweet deal to me), and then gets tucked under Obama's wing as a political adviser.

Deep trouble ahead, people...deep trouble...

[Leisler]

"Yes, of course...er Paulson. It is Paulson, isn't it? Never mind. You're name not important. We will continue to buy your paper notes, you just keep your side of the deal. Boy!"

[yefragetuwrabrumuy]

Since WWII, the US has been reliant on a growing, inflation economy based in ever increasing national debt. Whenever a downturn threatened, the Republican response was growth via tax cuts; the Democrat response was inflation and tax hikes. Importantly, both ideas resulted in an increasing debt spiral.

This was the fatal flaw. Not just that the spiral grew, but that the rate of growth kept increasing.

The two biggest debt holders are Japan and China, but Japan is no longer buying US debt, for which we would just owe interest, in fact, it is selling US debt, which means that the US must repay the principal, which is lot more than just the interest.

To do this, the only thing the US has done is offer to sell *more* debt, to China, the big buyer. But that gravy train is rapidly running out.

China has had an overheated growth economy at 7.5%, but because of the recession, the rate has dropped to about 4%, which is not enough to support their production bubble. Already one of their top consumer goods production cities has had 1M layoffs.

And China has had to fork over about $600B in their own bailouts.

The bottom line is that there is no way China can continue to buy such huge amounts of US debt. But the US cannot spend money if it cannot raise debt.

Already $7.5 Trillion has been promised by the US government. In real terms, that is half the annual US Gross Domestic Product. It is money they don’t have and can’t get.

If no one will, or even can, loan the US government more money by buying Treasury bills, the government will have to “monetize the debt”, which means just declaring that money exists for them to spend. This causes two things to happen.

First of all, hyperinflation of this “virtual money”. But at the same time, deflation of paper money and coins. Since monetized debt is not backed by anything, no one is obligated to accept it, as it is worthless.

However, paper and coins are “legal tender” that will deflate, because they are in great shortage in the US, with only about 5% of our daily retail trade backed by paper.