OldLimey

Why the U.S. Should Learn from China's Foresight

tuj:

1. If by 'default' you mean refusal to pay - then I agree, US debt should be as good as anybody else's (although a year ago I thought AIG was a solid company, so any assumption these days has to be treated with some degree of circumspection). But the type of 'default' I think a growing number of foreigners are concerned about is the deliberate use of inflation to devalue an unpayable debt.

2. It's true that the large holders of US Treasuries are in a tight spot, not being able to head for the exits in force for fear of provoking a stampede, but I would pose two questions:
i) Even if they don't sell out from their existing holdings, how much longer do you expect surplus nations to carry on shovelling their wealth and their future prosperity into further purchases?
ii) Given that Japan and China in particular (Russia and Korea to a lesser extent) have the fruits of past labours tied up in USD-denominated assets, do you not think it likely they will be quietly diversifying and - should the dollar dam actually burst - they would be prepared to get out quickly? Wouldn't you adopt this approach with your own wealth?

3. Judging by your reference to potential recourse to the use of force to solve what is an economic and financial crisis, I'm presuming you are US-based. If that is the case, you might not be fully aware of (and perhaps do not even care about) the extreme damage being done to America's reputation overseas. Assets whose stewards have a severely damaged reputation - in this case the USD - are inevitably viewed with suspicion by investors who have alternatives. My sense is that the search for alternatives is on. This will probably play out over a span of years, and in the interim it is quite possible that the USD may have more 'time in the sun'; in the long run, however, I think its days as the sole reserve currency are numbered and in this respect we might in future look back at last weekend's Northeast Asian summit as quite significant.