So I think what I am hearing that each country has the other by the balls and their isn't anything that the other can do at the current time.
Here is an article that I found that might be of some interest to you guys about the relationship of China and America called
The Dragon and the Eagle
Here is an excert that seems to describe the situation almost to the letter:
"For a more detached viewpoint, to look at the two economies separately is like looking at the two wheels of a bike without looking at the frame that
connects them. Looking at the US-China bi-cycle in motion exacerbates the separate notes of caution that international agencies have sounded against
each country. In fact, there is an inherent and additional precariousness in this double bubble act.
Veteran New York money manager Arnold Schmeidler—who did not invest in dot.com IPOs—warns, "We are in a period unlike anything since the 1930s
when the world is confronting deflationary forces." The president and founder of A R Schmeidler & Co Inc asks how sustainable it is that "American
auto companies are selling their production at zero interest rates, because there is excess capacity. But China is building auto plants to make
hundreds of thousands of vehicles, so we have extra capacity being brought into a market where we already have excess capacity. So the trend is
towards 40 cents an hour wages and top quality competing against the US."
Schmeidler concludes, "The single greatest force for deflation is when you have open trade between nations that have the ability to import the most
efficient manufacturing expertise into a low-wage-base society, and so can produce products of the same quality as the high wage economy. The price
pressure on the product allows consumers to get more for their money and they benefit. But it is disinflationary, if not deflationary."
In fact, of course, China currently is lending the US the money to buy Chinese production.
For example, as the "boom" of President George W Bush takes off, puzzled American commentators are asking where are all the extra jobs that the
apparently positive indicators should be creating. In fact, they are being created abroad—mostly in China.
China recycles trade surplus into US Treasury bonds
American companies may have forgotten what Henry Ford propounded when he first built his Model T: If you do not pay high enough wages to your workers,
they can't afford to buy your product. One simple basis for that Bush boom is that China is recycling its US$100 billion-plus trade surplus with the
US back into dollars, and especially into US Treasury bonds. Almost half of the US Treasury bonds are now owned in Asia. So China is financing Bush's
bold economic experiment: running two or more wars simultaneously with a huge budget and trade deficit, and equally huge tax handouts for the richest
One has to question the long-term economic rationale for China of putting its long-term assets into very low-interest bonds in a currency that has
already dropped recently by a third—and is going to drop even more. It certainly makes strategic sense: if push came to shove over, for example, the
Taiwan Strait, all Beijing has to do is to mention the possibility of a sell order going down the wires. It would devastate the US economy more than
any nuclear strike the Chinese could manage at the moment.
But far from wanting to devastate the dollar, China is more concerned to maintain its currency's parity with the dollar, even as it devalues
massively against the Euro or the Yen. Indeed, without those Sino-dollars flowing back, the dollar would have tanked even more.
There is a big multiplier effect here. China only accounts for 3 percent of the world's GDP, but for from three to five times as much of the world's
growth. And its economy is disproportionately trade-oriented. So its double act with the US—both the seller of consumer goods on a huge scale and
the financer for US' purchase makes it even more important.
It does not help that the US, which has the experience, certainly shows no signs of using it to assess longer term dangers, and even if China had that
foresight of perils ahead, Beijing lacks the experience to act effectively.
Dangerously, the global economy is faced by an addictive combination of China—a developing country with many problems of social instability—and
the US—which the recent IMF report hints is a rapidly undeveloping country—whose fiscal irresponsibility is compounded by a political immaturity
that tends to ignore geopolitical and economic reality.
If the US economy sinks and Americans stop buying Chinese goods, then it will compound the US slump as China first stops buying US bonds that have
inflated the American bubble and then moves on to selling them. On the other hand, if the Chinese economy falters and it stops recycling dollars into
the US economy, then the boom stops anyway. Indeed, it seems that China increasingly will need more of that cash to pay for energy imports anyway.
But New York money manager Schmeidler, and others who remember that economics is the dismal science, realize that it is still better science than
politicians drumming up votes and investment bankers drumming up business seem to understand. The West is in the red, and if it crashes, the East may