the fed is in a dangerous game with china

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    China is glad to see Americans going on another shopping spree. Its factories are cranking up production at an unprecedented pace and capacity is tightening. China's exports to the US jumped 35 per cent in the first quarter compared with the first quarter of last year and the trend is accelerating. The US's bilateral trade deficit with China has reached $110bn, bigger than with any other country.

    In effect, China is trading goods for US paper. The rapid accumulation of Chinese reserves means the Chinese are buying dollars to keep their own currency steady. This has allowed US interest rates to remain low, which in turn has encouraged American consumers to buy more Chinese goods.

    This game of "trading goods for paper" creates a hyper-stimulative environment for both countries' economies - which authorities on both sides of the Pacific want. The Chinese and US currencies are falling against the euro, money supply in both economies is going up and interest rates are low. All of these are powerful stimulants for economic growth and share prices.

    A further surge in bond yields could mark the start of the long-foreseen demise of US consumer spending and damage the US economy. This will probably be the moment when investors find out whether the game is a boon for the world economy, or a bane that merely defers another recession and bear market in stocks.
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