[MENTION=21524]oldfart[/MENTION]
I forget to mention I'm also skeptical of modelling in economics. I use them as a way to educate people within the their limitations. Just sayin'.
No, not at all. The dollars would bid up prices and weaken the dollar. Just as if the FED printed them or whatever. Besides that, don't you find it at all absurd that by selling something you make it more desireable? That's kind of like an oxymoron, if there ever was one. Possible but extremely unlikely...
At the end of the day, when all is said and done, all we owe China is bank statement from the FED. This is what people don't understand, it can never become a financial strain in any capacity, unless credits and debits between reserve accounts and securities accounts entails more than accounting entries.
There are real products entering the US and leaving the China... those are not just accounting entries. As for productive capacity, the problem is that it's not in the USA, and whatever there is the foreign economies are going to compete to get the real goods out of it... if the scenario ever happens.
I think you are leaning too far into keynsian logic where if demand is increased goods simply appear. BUT even if you think this way, then you are loosing out the productivity you could attain with your own printing press so you will lose in the form of opportunity cost in any case.
Of course these would be real products leaving for China. We already have a ton of excess capacity, so I don't see a problem in this hypothetical scenario. If the economy has significant idle resources it really isn't important if demand outpaces productive capacity. Our economy will expand to accommodate Chinese demand and we'll absorb these idle resources and turn them into productive ones.
We have to realize that countries w/external deficits finance any savings desire of financial assets denominated in said currencies of any countries running a deficit. If these deficit countries stopped buying such a desire would be remain unfulfilled.
In order to pursue such a desire, any counties running a surplus are ok w/sending real goods and services (resources) to the deficit country. What does China get in return? A bank balance at the FED.
Of course these would be real products leaving for China. We already have a ton of excess capacity, so I don't see a problemin this hypothetical scenario. If the economy has significant idle resources it really isn't important if demand outpaces productive capacity. Our economy will expand to accommodate Chinese demand and we'll absorb these idle resources and turn them into productive ones.
Where is this excess capacty that can be put to use merely by increasing the aggregate demand? Come on... this kind of free lunch simply does not exist in the real world. And if it does, the FED+govt could and should be utilizing it anyway and the chinese or whatever would take that off the table. You are ignoring the opportunity cost and the fact that the excess capacity whatever you mean by it can't be that simply utilized if it could, it would be utilized already.
Also, I don't believe that increased AD will lead to anything in the long term. It's a way to balance fiscal cycles, not a way to get you into permanent prosperity. As far as I know the long term GDP numbers performed better when there was "lack of AD" aka. deflation in the long run. It's silly to think you can boost your economy in the long run by boosting AD by ever increasing amounts. I don't think there is much evidence that this works generally. Likewise there is little evidence that there wouldn't be cycles of unused excess capacity if the China dumped it's dollar nominated assets, in fact, such scenaro would probably cause a other recession as people would have to move from service sector into manufacturing where the added demand was. The businesses could no longer afford the imports etc, it would be a classic supply shock with demand stimulus, resulting in high inflation and unemployment.
In other words, the short term economy would most likely not pick up in response to China dumping it's dollar assets, in fact the opposite. And the long term economy would not be boosted either. Why not just admit that when someone dumps your assets it's probably not going to be a great deal. The worry is entirely warranted n my opinion, but will it play out, and how quickly... that's the real question.
