Suppose that you are a research analyst at Goldman Sachs and you are invited by Bloomberg to
join a live panel discussion on US-China bilateral trade situation and related economic and
financial issues. As a representative of your firm, you must follow Principles for
Professional Practice by offering your economic and financial insights instead of political
opinions.
During the panel discussion, one panellist says: "The situation of persistent US-China current
account deficits is untenable. If the US government does not do something about this, the dollar
will tank. The deprecation and associated higher volatility will undermine the international
currency status of the US dollar. Moreover, the US has become a huge debtor to the rest of the
world, China in particular, thanks to these trillion-dollar trade deficits."
Another panellist adds: "Apparently, China has made a terrible investment decision of holding a
tremendous amount of US Treasury securities. The huge trade deficits and the Fed’s QE have
been building up the risk of inflation and dollar depreciation in the future. When the bad time such
a global financial crisis or economic recession comes, the dollar tumbles and China will suffer
colossal losses from investing in US Treasurys."
How would you respond to the above two panellists’ comments?
Please explain your answer based on theories and empirical evidence established in the
academic literature of finance and economics. Political opinions are irrelevant to the
question