With China holding 1.16 trillion dollars of US debt, the current crisis and what the Fed decides to do about will have implications to China. Many believe that the US will undertake QE3 (quantitative easing) which allows more cash in the system, but has the effect of devaluing the US dollar. Countries like China and Russia have already warned the US about the effects of these policies, yet with a high unemployment rate trillions of dollars worth of debt coupled with growing entitlements, the US has little room to maneuver.
Asia Set to Follow the Middle East
As Middle Eastern markets tumbled on the news of the S&P downgrade of US sovereign debt all eyes are on Asia, most notably China and their markets’ reaction to the downgrade. The assumption is that there will be a sell off roiling markets in Europe and then back on Wall Street. With news that the S&P could in fact do another downgrade if the proposed cuts are not made has supercharged the potential catastrophe in the markets.