…they were talking about how during the US mid-term elections the Republicans/Teabaggers made up lots of ground towards the losses they suffered back in 2008 when Obama got in. Something was said about the Republicans vowing to vote against agreeing to the new US debt cap (or something) early next year and the commentators on R2 were having kittens about this meaning that the US will default on all their debt. Lots of this debt is held by China, who are currently doing an exaggerated pimp-swagger whenever seen in public as a result.

Could someone with some understanding of economics enlighten me as to how this is all extremely bad, and why it is so?

??

imagine the global superpower equivalent of “it’s not fair; classifieds deal gone horribly wrong”

with tanks and dat shit

Republicans vowing to vote against agreeing to the new US debt cap (or something)

if I knew what this actually meant I could comment. Makes no sense to me Im afraid.

And US wouldnt need to default on debt, as the world’s reserve currency they can just print their way to lower debt.

Essentially, the Republicans are saying that they’ll not agree to the debt cap. “What’s a debt cap?”, I hear you asking.

The U.S. government can’t accrue debt above a certain ceiling. In the most extreme scenario, the government would default on certain debts if the cap doesn’t move.

Some of the new Republicans have said that they’ll vote against raising the debt cap (which they need to do – their deficit is considerably worse than ours, even proportionally) unless Obama agrees to major spending cuts. As they don’t like any of that liberal namby-pamby helping the poor cr@p, this is a standard demand.

So either Obama and the Democrats cave in, and hobble their programmes, or they don’t cave in, and the dollar gets really devalued.

The Chinese are sitting there laughing, knowing that they have an exceptionally strong hand when it comes to negotiating anything with the U.S.

nick and what stops them using QE to give themselves headroom under the cap?

Stoner, my understanding – possibly wrong, I’m a Brit after all – is that they’re not allowed to just print their way out of it. And even if they could, that gives them a load of other problems, not least the very real issue of inflation.

because the US$ is a reserve currency they are in the enviable position of being able to print money almost as much as they like without having a substantial effect on prices.

Whether they permit themselves to is another matter, and just as congress could knacker a debt issue plan they could probably slam the brakes on any QE program too I imagine.

I confess Ive not been following the US problem very closely. Too much hyperbole for any sensible assessment. Bit like in here really 😉

Wouldn’t massive QE lead to a serious devaluation of the dollar?

Quite ironic really when that is what the US have accused the Chinese of doing with keeping their currency artificially low?

China holds US debt as a method of deliberately holding down the Yuan, and therefore driving exports.

As a result, stopping lending to the US / the US defaulting on their loans isn’t really good for China. This is the scenario that will be upsetting the Chinese government.

IMO the prospect of a US default is pretty unlikely.

OK. So it’s generally just a case of China are the big boys now cos they’ve got all America’s dinner money, and we’re to take it that that’s a bad thing because we’re all so used to the US being the big boys. Kind of fear of the unknown.

aha! Found it after loads of searching. One of my favourite Economist cartoons:

always makes me chuckle.