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8/31/15

Global Economy: US and Chinese Economies are in "lockstep" and this could spell major trouble for US

Let no one fool you - specially not the Wall Street "news makers.

Both the US and Chinese Economies are in lockstep and the US economy could get  in big trouble because of that.

The investment relationship that has blossomed between China and the U.S., even though it has benefited both countries, has also made both of their economies very dependent on each other, but the US more so than China.

Chinese companies have started  more companies or joint ventures in the U.S., thereby increasing the number of Americans working for Chinese firms.In a sense China has now also become a supplier of secondary capital to the USA, in addition to the regular  US debt they have been buying up..

Another alarming fact is that based on the present (June 2015 figures) US debt to China stands at $1.272 trillion,.

That's roughly one-fifth of the $6.175 trillion held by foreign countries. The rest of the $18 trillion debt is owned by either the American people, or by the U.S. government itself.

The United States has thus allowed China to become one of its biggest bankers, to provide the American people low consumer prices.

This selling of debt to China is mainly used by the US to help the US economy to grow by funding federal government programs. It has also kept  U.S. interests rates artificially low. However, what very people want to talk about, specially the financial world, is that China's increasing ownership of U.S. debt is shifting the economic balance of power in China's favor.

China's position as America's largest banker also gives it considerable political leverage. Consequently every now and then China threatens to sell part of its US debt holdings. It knows that, if it did so, U.S. interest rates would rise, which would slow U.S economic growth to a trickle.

As China grew economically stronger it has also been calling for a new global currency to replace the dollar, which is presently used in most international transactions. China usually makes this call whenever the U.S. lets the value of the US dollar drop, which makes the debt China holds less valuable.

China certainly is not so stupid to call in its US debt all at once. If it did so, the demand for the dollar would plummet like a rock. A dollar collapse would disrupt international markets worse than the 2008 financial crises and China's economy would suffer along with everyone else's.

It's more likely that China will slowly begin selling off its US Treasury holdings.

Bottom line the financial poker game between the two most powerful economic players in the world is certainly not over yet, but China is holding some very powerful cards in its hand.

The financial world better sit up and start smelling the roses.

EU-Digest


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