Erik Larson

Oct 14, 2008

China, Puppetmaster

Long time friend and former colleague Mike Pool recently raised the “China, puppetmaster” spectre. I think it’s overblown. A fiction from the right and left, as follows: China’s tentacles into the American economy are a pending catastrophe. Perhaps. But respected financial market strategist David Smick, in his recent book “The World is Curved”, recounts a discussion with a senior official at the New York Federal Reserve, regarding what would happen to the US economy if China suddenly stopped buying US Treasury securities. The official’s response? Interest rates would skyrocket. Maybe 35 basis points! Maybe even 50! (Smick was expecting 300-400 bp). That’s hardly a meltdown. Investors in US bonds are a huge and pretty diversified pool. That said, I’m more worried about the “drip, drip, drip” of gradual decline than a China catastrophe…