Little Oscar is troubled about the financial news. He has seen far too many references to the word "hyperinflation" in the media. He doesn't know a lot about economics, but he knows that some pretty nasty things have happened to debtor nations in the past, and he knows that the U.S. will be borrowing more than ever to pay for bailouts and the stimulus package. What if China pulls the plug?
China holds more U.S. treasury bonds than any other country -- $681 billion in November. But the Chinese are worried that the unprecedented spending plans of President Barack Obama and the Democrats who now control both houses of Congress will cause serious inflation and drastically reduce the value of their dollar holdings.Or what if the Fed decides to inflate its way out of debt by printing too much money and triggers hyperinflation? Little Oscar worries that he may one day have to take his rapidly shrinking retirement savings to the grocery story in a wheelbarrow the way they did in Germany in 1923. This is what keeps him awake nights. He probably just needs to get more exercise.
If China dumps all or most of its dollars, Japan, the second-largest holder of U.S. treasury bonds, will follow suit, and the United States could find itself bankrupt overnight with a nightmare hyperinflation comparable to that of Zimbabwe today or of Weimar Germany in 1923.
U.S. officials, therefore, are trying to convince the Chinese to keep investing in treasury bonds. That was why Secretary of State Hillary Clinton made Beijing and Tokyo her first destinations after taking office.