It is essential for China and the US to cooperate on monetary policy. During the enormous consumer-led boom in the US and consequent export boom in China, the US issued massive amounts of IOU's in the form of US dollars, but what most people fail to see is that the other side of the equation requires China to extinguish the IOU's by buying goods/services/assets in exchange for its dollars.
While the US continued to grow and its economy could continue to absorb huge amounts of Chinese exports, the brewing problem could be ignored. But not anymore. The financial meltdown in the US caused the recession which in turn has focused a huge, bright light on the international trade imbalance. Now the IOU's have to be reversed. China must buy goods/services/assets from the US and the dollars must come back.
If China and the US do not cooperate through this massive monetary realignment, the US Dollar could fall precipitously causing inflation in the US and a huge degradation of wealth in China. this is not a good scenario for the global economy. To prevent this, China must focus its economy domestically and import from the rest of the world, especially the US and trade must be liberalized.
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