China's has started an ongoing process of jacking up their interest rates in order to slow down their economy and to keep the value of the yuan strong while stopping inflation. The U.S. on the other hand is doing approximately the opposite. Through the Fed's policy of Quantitative Easing (QE2) it is printing money to buy up government debt, driving bond yields lower and forcing people into the more risky stock equities, all in an effort to keep corporations growing, and in theory stimulating new hiring, while at the same time making borrowed investment capital cheap, which in theory helps people with mortgages and other loans along with putting small businesses in positions of favorable liquidity levels.
All this as well, in theory, resuls in more refinancing, spending and expansion/hiring. This also makes for a larger supply of dollars in our economy, which, in turn, drives down the value of each dollar--which means dollars aren't worth as much anymore and the places at which we are buying things start to want more of them. In other words, our prices on things like food and gasoline go up (I'm sure you've noticed). How does Congress keep buying things the government needs at these high prices? Answer, they try to borrow money from China. Problem...since U.S. prices have gone up, so has the price of buying a US Treasury Bond--the thing that Treasury Secretary, Timothy Geithner wants to sell to China for money to finance our government's operations (that's how we borrow money from China--by selling US Treasury Securities--which are kind of like I.O.U.s with payouts (to the Chinese) along the way till the due date--we get a lot of cash up front from China in return). Look, the price of our bonds have gone up. China will have to use more of the dollars she's got stashed in her bank to pay the higher price (she got those dollars originally when we bought her stuff at Walmart (and other Chinese marketing channels), who, in turn, sent a sizable portion of their dollar revenues back to China after they taking their cut). The question now is, will China want to drain her dollar account in her bank to pay for the more expensive I.O.U.+/U.S. bonds at the new higher price? Not so much.
All this as well, in theory, resuls in more refinancing, spending and expansion/hiring. This also makes for a larger supply of dollars in our economy, which, in turn, drives down the value of each dollar--which means dollars aren't worth as much anymore and the places at which we are buying things start to want more of them. In other words, our prices on things like food and gasoline go up (I'm sure you've noticed). How does Congress keep buying things the government needs at these high prices? Answer, they try to borrow money from China. Problem...since U.S. prices have gone up, so has the price of buying a US Treasury Bond--the thing that Treasury Secretary, Timothy Geithner wants to sell to China for money to finance our government's operations (that's how we borrow money from China--by selling US Treasury Securities--which are kind of like I.O.U.s with payouts (to the Chinese) along the way till the due date--we get a lot of cash up front from China in return). Look, the price of our bonds have gone up. China will have to use more of the dollars she's got stashed in her bank to pay the higher price (she got those dollars originally when we bought her stuff at Walmart (and other Chinese marketing channels), who, in turn, sent a sizable portion of their dollar revenues back to China after they taking their cut). The question now is, will China want to drain her dollar account in her bank to pay for the more expensive I.O.U.+/U.S. bonds at the new higher price? Not so much.
What's Congress going to do if China won't buy their bonds/lend them the money they need so that they can keep spending money on stuff that they and President Obama want? Answer, you're not going to like it but...they're going to have to stop spending so much money on us, also they're probably going to raise our taxes to get more money. They're probably also going to keep purchasing the Treasury's securities, trying to stimulate the economy, while at the same time driving up inflation and making the dollar worth less, until our money won't buy us the things we need and our standard of living is gone, all the while the government sinks under its accumating debt. Why is bankruptcy a possibility?-- because our country is over $14,000,000,000,000 (that's $14 trillion--with a 't'--in debt (that's about the same amount of money value that everyone in the entire country (U.S.A.) produces together in one year (GDP). The country that is the single largest holder of that debt is China.
What's all this mean to U.S. citizens? 1) We're going to have to get ready for the government to not spend so much money on us; 2) we're going to have to stop spending so much money on things we don't need, be smarter shoppers, negotiate better deals, make sacrifices, and try to find new ways to make money; and, 3) prices on food and gasoline and other things are probably going to keep going up, until the Fed stops the type of activity described above..
Now is the time to fix this and prove we're Americans.
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