Sunday, October 12, 2008

FT Alphaville » Blog Archive » Kemp: “The United States is now, in some very general sense, bankrupt”:

Whether they like it or not, China and the other reserve accumulators are going to take a hit as a result of the crisis. If their mortgage-backed bonds are not written down, the alternative is that the US Treasury issues a huge pile of new debt, driving up yields and cutting the value of their existing stock of Treasuries; China and other countries have to continue accumulating even more US government paper – increasing their already high exchange rate exposure – or risk catastrophic losses on their current bond holdings; the US tries to devalue its way out of the problem, boosting exports but harming China’s exports; or the US tries to deflate its way out of the problem, cutting government spending to reduce borrowing requirements, but pushing the economy into a deep recession that would also cut imports and hence China’s growth rate.

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