One of the weird ways my brain works is that I’m always dissecting things and figuring out how they work and what impacts things have.

Economics is a fascinating area to think about in this regard because there are an infinite number of variables to consider. Each person in the system has their own motivations – intrinsic or extrinsic and their actions are impacted on by countless external factors such as the weather, the availability of money, their job situation and family situation.

Then there are key players – people in power who are not replaceable – or who, if they were replaced would follow very different paths. Steve Jobs comes to mind. Any other CEO of Apple would have lead the company down a very different road.

Thinking about how all these factors interplay on each other is a fascinating mental challenge.

This brings me to something I have been thinking about lately.

Interest rates are at historic lows mostly due to China loaning the rest of the world as much money as they can print in an effort to suppress the value of the Yen and keep Chinese exports competitive. This seems hardly sustainable, and indeed China has recently stopped lending money to the US, for the time being they are investing more heavily in Euros. This has caused a major shift in currency valuations over the last few months with USD dropping in value and EUR going up.

Honestly, this is a little worrying.

Interest rates in the early 80’s nearly hit 20% and while it may be a while before we see numbers like that again with China stopping the flow of money rates will certainly go up. But the China Central Banks decision to stop buying USD has resulted in a growing potential problem of many smaller Chinese banks picking up the slack and investing in USD.

The US government is buried under a mountain of debt, and they may decide to use inflation as a tool to help pay off their debts. It’s a slippery slope and one that could result in a lot of problems. If the inflation exceeds the return on US T-Bills then they risk all those small Chinese banks dumping their investments and flooding the market with more USD – spurring more inflation.

Controlling a situation like that would require a big spike in the federal interest rate. And it could happen relatively quickly.

— Lots of moving players and factors to consider. It is pretty interesting to speculate.