Here JD, something for you to bring into the discussion...
http://www.chinadaily.com.cn/bizchina/2 ... 897708.htm
The previous article "Golden Dragon or Sitting Duck" had this in it as background:With over a trillion dollars sitting in its exchange reserves, earning the going rate of 3 to 4 percent for US treasury bonds, barely maintaining its value in real terms, is China in danger of putting all its eggs in one very fragile basket? Recent research by Morris Goldstein of the Institute of International Economics demonstrated that despite announced changes in a revised basket of currencies the Chinese currency remains pegged to the US dollar. Why should this be worrisome?
In two words: portfolio diversification. The safety of one's savings, even for a nation, should be the paramount consideration in guiding investment strategy. But with the US current account deficit approaching 7 percent of GDP, the largest ever recorded by any country, questions arise whether this is sustainable. The flip side of this is foreign purchases of a growing share of US financial assets, now reaching 30 percent of GDP.
With any action to correct its imbalances unlikely until after the 2008 US presidential elections, will America's creditors experience a Woody Woodpecker moment? Economist Paul Krugman uses the analogy to Road Runner cartoons to demonstrate a sharp, unexpected turnaround in investor behavior. In these cartoons, Woody is chased by his nemesis, Wilie E. Coyote, who, during the chase, unknowingly runs off a desert cliff but continues running, this time over thin air. Nothing happens until Wilie looks down, realizes nothing is holding him up, and suddenly plunges to the desert floor below.
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