Don’t take my word for it. Here’s Ben Bernanke’s words from a 2002 speech on what could be done in the event of a deflationary slowdown:

“A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association). “

The US may discover that the worst way to wean China and other non-democracies away from authoritarianism is to pursue aggressive imperialist policies around the world. That drives China and Russia to use their economic might to serve their political and strategic ends, not to free their economies from politics. By trying for global hegemony the US is contradicting all that it says it stands for. Not bright.

Anything that involves services is easy, since there’s no direct need to increase physical consumption. If the doctor treats the teacher’s kid, and the teacher educates the doctor’s kid, for example.

I think– I hope– we’re going to be amazed by how the Chinese handle their new-found prosperity. China has a few thousand years of experience in managed economies and I imagine they have come up with some tricks that we could learn from. (In that regard, consider World War II, where we ran enormous deficits for 4 years without inflation and managed to come out of the war in much better shape than when we went into it, all without free markets in many areas. That’s by no means an endorsement of managing the economy, just a statement of fact that under the right circumstances, managed economies can function efficiently.)

See?

Your assumption that oil exporters will park their excess cash “in US financial assets” is at odds with the advice they received on May 18 from Pres. Bush.
http://thescotsman.scotsman.com/latestnews/You39re-running-out-of-oil.4095858.jp
“The rising price of oil has brought great wealth to some in this region, but the supply of oil is limited, and nations like mine are aggressively developing alternatives to oil. Over time, as the world becomes less dependent on oil, nations in the Middle East will have to build more diverse and more dynamic economies.”
I translate: “Keep in mind that you are eventually going to run out of the black stuff, and that we are determined to turn our crops into ethanol and biodiesel in as much as we see fit, no matter how many people in food importing countries (like yours) starve along the way.”

(Sarcasm on) But fear not, for recent history unequivocally shows that savings parked in US financial assets maintain their purchasing power in terms of agricultural products. (Sarcasm off)

And to assess correctly how critical this issue is, you need to know that oil is not the only (or even the most critical) ME natural resource that’s limited. Water is.
http://www.usnews.com/blogs/beyond-the-barrel/2008/05/21/forget-saudi-peak-oil–worry-about-peak-grain.html
“Thanks to water depletion, by 2016, Saudi Arabia will be one of the world’s major importers of wheat, the U.S. Department of Agriculture projects. What price will Saudi Arabia pay for grain to feed its Texas-size population of 23 million, which is growing at a relatively rapid rate of 2 percent per year?”

So, Pres. Bush is definitely right in advising them “to build more diverse and more dynamic economies”. And parking their savings in US financial assets is not the way to do that. Nor is it building theme parks or financial centers. The future is about having food and water, and therefore ME countries should be investing in solar water desalinization plants to allow future generations to be able to grow their own food. And if they can’t use all their savings for sensible purposes now, they should just pump less oil, saving it for the future generations, not only theirs, but the importing countries’ as well.

Because Keynes’ “in the long run we are all dead”, when looked at from the perspective of the physical limits to growth, is followed by an implicit “and we do not give a $%&* for those who will be living then”.

I’ll believe China promotes China consumption when I see it it and not one minute sooner. This last shot was very good:

If the slowdown in sales to the US — and China’s very visible domestic needs — lead China to issue bonds to finance infrastructure investment in China rather than the purchase of US bonds and banks, the US should applaud. That would be the kind of rebalancing of China’s economy toward domestic demand that the US and others have long argued is needed to reduce China’s surplus.

It would do both countries a lot of good to see China spend more on the Chinese.

Ironic that the solution to the threat of Chinese bond sales is something that presumably correlates with a further deterioration in the US current account (oil) deficit.