As rampant inflation in China began to spillover into worldwide price increases, I was waiting for global stock markets to plummet. Without global inflation, the United States, Great Britain and the European Union could print as much money as they wanted. After the first round of the quantitative easing, QE1, they could start again with QE2. But now inflation has truly arrived. For systematic reasons, China hasn't been able to stop printing currency faster than it is growing. And this has affected inflation in Western countries on two levels: First, China's oversized demand for crude oil, food and other commodities has pushed up global prices. Second, the rising prices of Chinese exports have pushed up core inflation rates in the Western countries that import them.

As inflation worsens, Great Britain and Israel have both seen crises of varying degrees, and trouble in the United States is not far off. Western countries hoped China would tighten its monetary policy, leaving the U.S. and EU leeway to loosen their monetary policy and stimulate growth. During QE2, U.S. Treasury bonds relied entirely on the purchasing by China and the Federal Reserve. Americans didn't want to hold their country's debt anymore. When the Fed converted the U.S. government bonds into currency and debased the dollar, it not only intensified global inflation but also drove a rally in the U.S. stock market. This created big bubbles in both the U.S. bond and stock markets, which relied on the Fed's busy currency printers. The longer the bubble lasted, the more funds it required. After QE2, the Fed stopped buying government bonds, and the bubbles burst. Thus, the U.S. stock market dropped for days before Standard & Poor's downgraded the U.S.'s credit rating. That downgrade only further weakened market confidence.

In order to understand the relationship between the U.S.'s credit rating and China, one must first understand the two countries' economic relationship. China needs to export cheap goods to the U.S. to get a foreign trade surplus. At the same time, it also needs to import machinery, electronics and luxury goods from the U.S. Because of the high returns on investment, high interest rates and the appreciation of the yuan, American investors want to put their money into the Chinese market. So the Chinese government exchanges dollars for yuan, and uses its foreign exchange to buy U.S. government bonds.

Let's see what might happen to bilateral economic ties after a downgrade of America's credit rating without another round of quantitative easing by the Fed.