The Price of Tomorrow: Why Deflation is the Key to an Abundant Future

by Jeff Booth

This is also happening between China and the US, and not in the way you might think. China has been buying US government debt as a consequence of trade. It now has more than $1.1 trillion of US reserves and tops the global list of US Treasury bond holders. As with Germany lending money to Greece, this can be looked at as vendor financing, such as you might get from a car dealer: I provide you cheap capital so that you purchase my goods, and I make more in the long run. It also helps to ensure a US market for China’s exports by keeping interest rates low, so that consumers spend more. But China cannot reasonably stop buying government bonds without collapsing its own economy, because then interest rates would move much higher in the US and cripple consumer spending, which would then collapse China’s economy. It’s a feedback loop in interconnected economies.