China Points Water Pistol at Our Heads | Paul Krugman

Paul Krugman does a good job of explaining why the popular notion that we don't dare alienate the Communist Chinese because we need to borrow money from them is false. We're now financing much of our own debt and if China dumped U.S. currency it would stimulate our economy, although it would hurt Wall Mart, the PRC's retail outlet. 

While the idea that we need the Chinese to finance our economy is "part of what everyone knows, it's also completely false."

"The bottom line in all this is that we don’t need the Chinese to keep interest rates down. If they decide to pull back, what they’re basically doing is selling dollars and buying other currencies — and that’s actually an expansionary policy for the United States, just as selling shekels and buying other currencies was an expansionary policy for Israel (it doesn’t matter who does it!).

As Dean nicely puts it, “China has an unloaded water pistol pointed at our heads.” Actually, it’s even better: China can, if it chooses, throw some cold water on us — but it’s a hot day, and we would actually enjoy it.

via krugman.blogs.nytimes.com