Friday, 21 January 2011

Debt Worries

Arguments about why we don't need to worry about the fact that China holds so much of the US debt re reminiscent of the old Mutually Assured Destruction arguments about the USSR.  The arguments  in the case of China are something like, "sure, China could badly hurt the US economy, but they'd hurt themselves in the process".  The arguments are reasonable, but they both make the troublesome assumption of rational behaviour on the part of the counterpart.  It may be reasonable to assume rationality, but one would rather not be in a position such that the nation's well-being depends on that rationality.  But more notable here is the fact that we're talking about something well short of total destruction. in the debt case  China could conceivably convince itself that the damage the US would incur is far more substantial than that which China would incur should they decide to use their US debt holdings to hurt the US.  Should that be the case, China might deem it reasonable to take the hit.  Incurring deep losses in order to impose deeper ones on your enemy is a fairly common practice in warfare.

No comments: