The Rise of the Dragon

IT ALL STARTS HERE…

1. China buys US Treasury Bonds, so…
2. Western financial institutions can lend Americans money, so…
3. Western consumers can BUY, BUY, BUY, so…
4. Chinese factories can keep making more stuff for us to buy, and…
5. The East and the West are both happy.

UNTIL…

1. Western consumers save -0.4% of their household earnings, which means…
2. Western consumers spend more than they have, and can’t pay their bills, so…
3. Western financial institutions are broke and stop lending money to those same consumers, so…
4. Western consumers stop consuming, so…
5. Chinese factories stop making stuff because Western consumers stop buying it, so…
6. China’s economy struggles, because…
7. China’s economy is an export fueled economy, and…
8. See above #4

ON TOP OF THAT…

1. Chinese nationalists save an average of 30% of their household earnings, so…
2. Now that their export fueled economy is sputtering they do not have the consumer stimulus to fill the vacuum, so…
3. The Chinese Government starts to BEG its citizens to spend more in the bad economy, but…
4. In bad times many Chinese are saving even more than before, so…
5. China buys MORE US Treasury Bonds…

This is extremely over-simplified but as far as I can tell, it is pretty right on.

Although I did read this morning at www.bloomberg.com in an article authored by William Pesek the following:

Feb. 2: China began using its hundreds of billions of dollars of worthless U.S. Treasury notes and bonds to sop up pollution in its rivers and lakes. The Chinese threw in the towel after Treasury Secretary Timothy Geithner renamed the 10 cent coin the dollar. Faced with a torrent of criticism about whether the White House had the authority to do such things, President Barack Obama said: “Yes, we can.”

So you can never be to sure what the future holds!