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Monday, August 25, 2008

A battle of minds for America's creditors

There is a great new post from Brad Setser at CPR. He highlights a quote from Dr. Yu Yongding that highlights the dilemma facing China as an investor in US debt.

“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic … If it is not the end of the world, it is the end of the current international financial system.” "-Dr. Yu Yongding @ Brad Setser: Follow the Money

US creditors are in a waiting game. It is also a losing game. So long as they pick-up the US debt instruments, and supply more credit to US - things are fine. This is aggravating the US deficit problem. If US policymakers start rectifying the problem - they will do things that will upset this fine balance. It takes me back to my december 2007 post.

This waiting game has big money at stake. The pay-offs are larger and margin of error is small. This looks like a lose-lose game to me. What say ye?