China is 'worried about' its $1trillion holding of US Treasury Bills. The Chinese Prime Minister, Mr Wen, complains that the US has spent too much and saved too little - without mentioning that the consumption boom was funded in large part by Chinese lending. Mr Wen can't sell the debt - its price would collapse - and is presumably fearful that the world's public borrowing binge will eventually drive up interest rates and again inflict huge capital losses on the Chinese holding. Indeed Mr Wen must continue to lend to the US in order to prevent this happening. I assume the possibility of a collapse in the US dollar, fostered in part by debt concerns and the US option to inflate it away, would also have crossed Mr Wen's mind.
This is interesting. Mr C wants to sell lots of gunk to Mr A. Mr A has a demand for the gunk and buys it by issuing Mr C IOUs at low interest rates. The IOUs are backed up by Mr A's reputation alone but Mr A finds himself in a bind and needs to borrow so much more that the value of the IOUs is called into place because interest rates might now need to be raised. Even if Mr A defaulted on the IOUs (or more realistically forced their value down) he would not lose a lot. Eventually Mr C would find it in his interest to forgive Mr A and to resume selling gunk again. Mr A, despite bewilderingly complex current problems, remains well and truly in the box seat.
Afterthought: This situation of the weak exploiting the strong has parallels but is not equivalent to the US Government bailout of firms like A.I.G.. The US bailed out A.I.G. with $170 billion because the firm was 'too big to fail' and threatened the failure of the international financial system. The bargaining strength in this difficult situation lies with A.I.G. which is probably the reason they felt they could get away with applying hundreds of millions of the bailout in bonuses to the parts of AIG that created the problem. And this strength infuriates the bailout-er. Larence Summers says “There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous.” Ben Bernanke says similarly “Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with A.I.G.” But the bailout must proceed!