A trillion here, two trillions there. Trouble.

Contrasting news stories. First the news, and then my comments :-)

News 1 from CNN: Uncle Sam is one trillion dollars in the hole. For the first time ever.

By the end of fiscal 2009, the government expects to be in debt by $1.84 trillion. The Treasury said it expects that its expenditures to approach $4 trillion while its income will only be $2.16 trillion.

For fiscal 2010, Treasury said it expects to have a budget deficit of $1.26 trillion, with $3.59 trillion in expenses and a slightly more robust $2.33 trillion in receipts.

While we are trying to digest what a trillion-dollar deficit might mean, it is quite a contrast on the other side of the world, which is News 2 from Bloomberg: China's foreign-exchange reserves surge, exceeding two trillion:

China’s foreign-exchange reserves, the world’s biggest, topped $2 trillion for the first time as the nation’s economic recovery prompted overseas investors to pump money into stocks and property. ...
About 65 percent of China’s reserves are in dollar assets, with the rest mostly in euros, yen and sterling, estimates Wang Tao, an economist with UBS AG in Beijing. It is “difficult to stop buying U.S. Treasuries when markets for most other assets are too small and too illiquid,” she said in a report last month.

Analysis from the BBC: How long will China finance America?

A recent speech by Zhou Xiaochuan, the governor of the Chinese central bank, conceded - in a slightly elliptical way - that China would have to lend more to the US, to see it through the current economic and financial crisis.

He said: "in the short run, the US may need more capital inflows to deal with the financial crisis".

So China will continue to fund the growing gap between America's public expenditure and its tax revenues, by recycling to the US the cash of overseas investors who prefer to invest in China's real assets.

Mr Zhou is clear that allowing America to live beyond its means is profoundly unhealthy for the global economy in the long term.

As he said: "over the long run, large capital inflows are not in its best interest of making adjustments to its economic growth model".

Or to put it another way, the US public, private and financial sectors all have to reduce their indebtedness: Americans have to save more.

But there is huge self-interest on the part of the Chinese in not forcing America to go cold turkey - in breaking its borrowing addiction - too quickly. China's exporters, squeezed savagely over the past year by the global recession, would hardly relish another lurch downward in US demand for their stuff.

I agree with Jim Fallows' and Larry Summers' observation that the US-China are locked in a mutually assured economic destruction: China needs American consumption. America needs the Chinese to provide the cheap money to finance this consumption.

This, however, cannot prevail for long. Will be quite a world when this Gordian Knot is untangled. I just hope it does not happen similar to how Alexander got rid of that knot.