Someone explain why the Chinese would do anything to destroy the value of their own dollar reserves.

Well, if (and it's a big 'if') the Chinese are narrow-minded enough to see the US as their only major competitor on the world stage, then they might (and it's a big 'might' also) be willing to knock their own economy down a rung or two in order to take ours out at the ankles.

Frankly, I don't think it's a very significant threat. The old Soviet Union, if it was in China's shoes today, might do something like that, but I believe the Chinese are, as said above, much more pragmatic about such things.

I agree, in general. If you were to ask me two years ago if the Chinese owning U.S. Treasuries were a problem I'd likely say no. Then the budget out look while not fantastic wasn't as grim as now. The economy was looking decent, perhaps getting a touch weaker.

I started hearing the same warnings two years ago, but in a sense we are in the same place today. It could be trouble or it could be fine. No one really knows.

That's one reason I'm comfortable with a fuzzy understanding of the China Problem. The future, the deleveraging, the unwind of the US debt, will be what it is (and probably unexpected).

Will US savings rates climb to match those in Germany or France? No one knows, or if a new consumption cycle will begin.

Working on a location for a fictional scene led me to Google Earth to look at various areas in China. You know what you see on the roads there? A lot of buses. Cars are few and far between. For that matter, roads are few and far between.

Last time I checked China's economy was a little larger than Germany's, a little smaller than Japan's. Google Earth around Germany or Japan and you see one hell of a lot more infrastructure.

China isn't Shanghai and Hong Kong alone, there's a whole lot of people still aspiring to their first bicycle out in the middle of nowhere China.

It will take more than a reduced ROI for them to abandon the policies.

MR above is on the right track. The Chinese authorities are very pragmatic. A lot of their national wealth is in the form of Treasuries (of various different sorts). They won't be eager to undermine it.

I agree, in general. If you were to ask me two years ago if the Chinese owning U.S. Treasuries were a problem I'd likely say no. Then the budget out look while not fantastic wasn't as grim as now. The economy was looking decent, perhaps getting a touch weaker.

However, being pragmatic also means that if the Chinese think things are going to go right down the crapper they might try to get in and use it before everyone fouls it up. Of course, that could percipitate the crisis, but hey, sometimes people do things for reasons at the time seemed good, but later look bad.

Its alot like a renewable resource extraction game. Most of the time the situation will hold that the owner of the renewable resources will manage it...well...pragmatically. However, if things get really bad then the owner might simply use up not only what he would normally use, but the "seed corn" as well.

The Obama Administration has to be damn careful they don't induce markets into thinking its time to eat the seed corn.

Someone explain why the Chinese would do anything to destroy the value of their own dollar reserves.

Are they trapped? Is it "pay me now or pay me later?"

And selling off .6% of their holdings? They've got to pay off their own fiscal stimulus somehow. I'd say it was a good use for it.

I sometimes wonder if economists are innumerate. China still has a long, long way to go before it assumes leadership of the world economy, if ever. To get there they'll need to solve a host of extremely serious problems including demography, environment, and complete lack of a civil infrastructure for a major economy or even a functioning banking or equities system.

The unexpected shift of course, again good and bad, is that our increased savings is starting to make us a little more china-like, and more able to fund our government debut ourselves.

I know I hold more state and federal bonds than I did a couple years ago.

Matt Yglesias and Ezra Klein have a request

Re. Charles, "Imagine the tools available to deal with these problems if there [had been] no federal deficit [riding into the downturn]."

how well they think they could go on without the US as a functioning economic entity...

I don't think it is a case that the Chinese think they can get along without a functioning US market. It is more that they are coming around to the belief that recent administration policies and actions are likely to make the US as a functioning economic entity of a size necessary to support their foreign trade needs a doubtful proposition.

It is not that the US won't function at all but will it function as the consumer of the world's goods or will barriers be placed to support government owned car companies and force domestic undesired, expensive "green" vehicles on the consumer. Or will cap 'n trade reduce the discretionary income of American consumers forcing more of their earnings to flow to higher fuel prices and favored carbon permit holders instead of consumer goods? How long before the total "carbon" cost of a product is increased to include transportation and foreign factory carbon outputs? Necessary to raise the cost of foreign goods so that domestic producers can compete despite their high regulatory and union labor costs.

All in all, the reduction in buying our debt is a signal that the foreign investors are expecting American buying power to be greatly impeded by government polices and not return to prior levels.

I can dream, can't I?

(/snark)