James Surowiecki from the New Yorker explains how the collapsing dollar has been kept buoyant by Japan and China, who are buying up mountains of American debt in order to keep the dollar from sinking so low that Americans can’t afford Asian imports. It’s not really working, though — as those of us who earn US dollars but live abroad can attest, the imploding American Peso is shrinking fast.
Of course, the Chinese and the Japanese could decide that the costs of the falling dollar are too great, and suddenly stop (or, at least, cut back sharply) their lending to the United States. This would lead to a so-called “hard landing” for the U.S. economy: high inflation, punitive interest rates, collapsing stock prices and housing prices. It would also lead to bedlam for China and Japan. Their best customers would effectively be unable to afford their wares. To paraphrase John Paul Getty: If you owe the bank a hundred dollars, you’ve got a problem. If you owe the bank three trillion dollars, the bank’s got a problem.
(via Kottke)