M:i:IV or, how to spend 2 trillion dollar before Hyperinflation or US$ devaluation(or both) wipe it out?

Today fabiusmaximus has a great post about shopping madness in the US.

Another shopping that we all should be more concerned about is that of China. The use that they will finally give to their 2 trillions(and counting) of Forex.
In this blog I will write quite a bit about the issue.
Take it as the ultimate financial and geopolitical Great Game.
The mission?
For China to get the most from its Forex before the US$ collapse.
Their long term strategies have been limited by the short-term self-interested choice of financing US household's consumption.
Keynes put it out pretty clearly: "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."
For the US the mission is to prevent the treasury bubble from bursting and the dollar from collapsing. Preserve its AAA creditworthiness and the possibility to run a twin deficit that finance its overstretched military expenditures.


On the one hand US officials would certainly prefer to have the trade-surplus countries retaining big stakes in the US economy. But since they cannot really prevent China to buy dollar denominated assets with its reserves, they can do their best to impede them to acquire strategically important assets, both in the US territory and abroad.
The big issues is that we still cannot really see whether the deflationary or inflationary outcome will prevail.
Here (and here)you can find a very good (and possibly final) post by London Banker, a former central banker and securities regulator, that takes issue with some of the conventional wisdom surrounding the efforts to remedy our economic crisis via liberal applications of monetary easing and fiscal stimulus.

From London Banker: "For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy. I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.
(...)
While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually conclude that parting with their savings under the terms now on offer will only deepen their losses. They would be better off keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode. The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese and Gulf States would suffer even more horrible losses from a collapse of the western economies. This is accurate, but not complete, as it ignores the relative value of cash investment at the top and bottom of a bursting bubble. Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.

Yves Smith also make some very good point.

From nakedcapitalism: "London Banker argues that punitively low yields will lead foreign investors eventually to retreat even from government debt. He argues that they will tire at throwing good money after bad, and will prefer to seek returns closer to home.
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If investors come to doubt the fairness of the markets, or think that the rot in its economy is not being cleared out and will undermine growth, that will hold investment back. As Brad Setser has pointed out, foreign capital flows have consisted almost entirely of central bank purchases of Treasuries and Agencies for quite some time, hardly a vote of confidence. We also have the question of how long the high dollar/low Treasury interest game can go on. Bernanke wants rates low to try to stimulate economic activity and has even broached the idea of long bond purchases to keep yields on the long end of the curve down. But the poster child of deflation and low interest rates is Japan, which due to its high savings rate, was not dependent on external funding. The US should want the dollar cheaper to boost exports, but that risks the ire of our creditors, who would take big losses on their FX reserves (many economists argue this idea is specious, but try explaining the loss in paper wealth to a populace not schooled in such niceties. FX losses, when the dollar was weakening earlier in the year, produced a lot of ire in China, including among bureaucrats). Similarly, even if you subscribe to the deflation outlook, 3%ish 30 year bonds is a pretty risky bet independent of the currency risk. So it looks like our friendly funding sources are likely to get burned one way or another, perhaps both. There is a real risk of a disorderly fall of the dollar, and it is hard to tell what the collateral damage would be.
(...)
There is another huge extenuating circumstance with the war spending that observers choose to forget. The US's problem in 1929, like China's appeared to be (at least in part) overproduction, that there might be too much global capacity relative to consumer demand.

Back IbnBattuta.
I feel compelled to end this post with the ultimate philosophical demonstration that overcapacity doesn't exist. I only wonder what Parmenides would have thought.
More on the topic in the next posts.