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China Threatens “Nuclear Option”- Could Crash Dollars Dominance

Reports are out today that China’s government has threatened to liquidate its US dollars, triggering a potential dollar collapse, if US lawmakers push for Beijing to reevaluate their own currency.

This is serious folks. This is worse than a random terrorist strike. This would be like a financial armageddon.

China holds nearly $1 trilllion (yes-TRILLIO N) in US bonds and currency, and quite frankly, it has been the financier of the War in Iraq, the cheap interest rates for housing, and the Bush tax cut to the wealthy scheme. Were China to decide that it no longer wants to hold US debt or currency, the table cloth that is the Bush presidency will be pulled out and all the dishes will come crashing to the ground.

At issue is the push from US lawmakers for China to reevaluate their currency, the yuan, to help dissolve the ever-widenin g trade imbalance between the two countries.  China has a clear history of manipulating its own currency for its benefit, and US lawmakers are considering whether or not to impose trade tariffs against China as retaliation.

Frankly, the US government should have seen this coming. Continual overspending and overborrowin g only leads to disaster. It is to the fault of every elected official over the last decade or more who has had a hand in creating this looming threat. But the Bush administrati on took what was a moderately balanced national budget and gutted it with tax cuts and a trillion dollar war. At the same time, the Fed played along by pushing interest rates to historic lows, encouraging Americans to spend, spend, spend. And they spent on things that come from China-electr onics, clothing, plastic crap. At the same time, US manufacturin g was shipped abroad, making the potential for the US to export goods the Chinese want nearly non-existent . And the Chinese could buy the stuff at home- it was all being made there anyhow.

Meanwhile, China kept taking the money earned from exported goods and turned around to buy US securities and currency, because the US dollar was the world’s main currency reserve. And at this point, it still is.

But Russia, Switzerland, and several other countries have been reducing their own dollar holdings as they watch the US economy enter uncertain times. And the fact that China holds such a large percentage of US debt is a major factor in what happens to the US economy. If China pulls the trigger and sells out, the US dollar could drop in value quickly, creating massive inflation and making the Great Depression look like a warm-up match before the main event. And if China sells off, others will follow. You can bet the farm on that.

The US government was foolish to let things get to this point. Regardless of the fact that for decades our economy and currency was stable, any economist with the sense of a grain of salt should have been able to predict the outcome of such an imbalance in trade. Couple that with China’s historic rejection of being forced into any position, and it’s clear to see that our leaders had their eye off the ball for some time now.

A collapsed dollar will have implications that go far beyond our borders though. Much of the western world will suffer too. As will China. But the difference is this: in China (and other developping countries) the people are used to having nothing and can adapt. In America, we expect to get the best all the time, and we can’t even remember what it feels like to do without.

I don’t have a solution though. It’s a damn shame we’re where we are. And we may well just have to sit back and let China do whatever it will with the yuan or else expose ourselves to financial disaster.

To think- if we had a president who cared more about America’s long term security and success, he’d not have thrown us all under that big Chinese bus to give his pals a few extra million dollars in tax cuts. And he sure as hell wouldn’t have spent a trillion dollars going after a band of terrorist thugs. Not when there were better choices to be had.

But then that assumes Bush cares about America at all. And really, he just cares about himself and his rich cronies. And hey- doesn’t Bush have a bunch of property in South America now anyhow? Wonder where he’ll be going when the US is in the shithole…

<tag> economy, China+sell+d ollars, Bush, trade+balanc e+China, China+nuclea r+option, recession, economic+col lapse, dollar+colla pse </tag>


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11 Responses to “China Threatens “Nuclear Option”- Could Crash Dollars Dominance”

  1. Ken:

    I am sorry but… You all here at BIO are fucking Doomsdayers.   You are worse than Evangelical Christians.

    The US is the largest Supermarket in the world. If we go, everyone goes… so does China. They’d be screwed without us because we buy all of their stuff. Everything over there is made to sell here. So they sell us off and who’d buy their stuff. No one. These are careless scare tactics laid down by the drive by liberal media.

  2. “Why, Tom, we’re the people that live. They ain’t gonna wipe us out. Why, we’re the people–we go on.” Ma Joad, The Grapes of Wrath

  3. I was suprised that the other markets took such a hit when ours did. From what I have been reading I thought a large part of that linkage had disappeared. .However the world is constantly changing. Iran want to trade in euro’s

    The dollar hegemony is key to the future of American global dominance, in many respects as significant if not more so, than the overwhelming military strength. And the Petrodollar has been at the heart of the dollar hegemony since the early 1970s. Almost two-thirds of the world’s currency reserves are kept in dollars, because oil importers pay in dollars and oil exporters keep their reserves in the currency they are paid in. The entire global oil trade is conducted in dollars. This means that everyone needs to keep dollars. This effectively provides the American economy with an interest-fre e loan, as these dollars can be invested back into the U.S.A. with zero currency risk. This money is not inactive; it is invested in dollar securities like US Treasury notes, stocks, mutual funds, and bonds. The US dollar’s current strength is supported by OPEC’s requirement that all OPEC oil sales be denominated in dollars. This was secured by an agreement between the US administrati on and Saudi Arabia, the largest OPEC oil producer. This had been determined in June 1974 by Secretary of State Henry Kissinger, establishing the US-Saudi Arabian Joint Commission on Economic Cooperation. In 1975 OPEC officially agreed to sell its oil only for dollars. ……

    Iraq was the first OPEC country, in November 2000, to convert its reserves from dollars to euros. This was the first time an OPEC country dared violate the dollar price rule. Iraq also converted $10 billion of its currency reserves to euros. Since then the value of the Euro has increased, and the dollar has begun to decline. Libya has been urging for some time that oil be priced in euros rather than dollars. Iran, Venezuela and other countries have indicated that they would denominate their petroleum trade in euros. During 2002 the majority of reserve funds in Iran’s central bank have been shifted to euros. Some in Saudi Arabia have called for switching to the euro as “a more effective punishment [than an oil embargo] for the United States, Israel’s principal source of financial and political support”. In October 2003, Russian President Vladimir Putin announced that Russia might price its oil in euros as well. Since the oil trade is a central factor underpinning the dollar’s hegemony, all these are potentially very significant threats to the strength of US economy in particular, and the US global hegemony in general.

    A prolong down turn in the market coupled with pressure on China to revalue their currency could cause them to dump the dollor or just stop buying our bonds. They would have to make the determinatio n of what was the best way to stay in power, it would be a political not financial decision.

  4. the link for the article on petrodollars quoted above is http://middl eeastinfo.or g/article439 8.html

  5. Sorry to be passing along the news you can’t bear to hear Steve, but don’t shoot the messenger. Just because you can’t conceive of any other nation trying to undermine US dominance doesn’t mean they won’t. And like I said, China has much less “respect” for its people than we have here. Just because they would take a hit doesn’t mean they wouldn’t drop the dollar in favor of another currency like the Euro.

    Chris- I knew about the Iraq oil bourse going to euros. also that Iran was considering the same. and frankly, the OPEC agreement can be changed by OPEC and what would we do? Bomb all the OPEC countries?
    If the petrodollar transforms into the petroeuro, the underpinning of the dollar as internationa l reserve currency would evaporate and so too would US power and might (at least in large part.)

    BTW- it has been noted that the Iraqi switch to euros was one of a number of precursors that led Bush to go to Iraq to begin with. But as I noted above, we can’t declare war on the whole oil-producin g world.

  6. Well right now its petty brinksmanshi p. While I do not discount the Chinese threat, they would screw their economy big time. Ken you state that the Chinese are used to not having anything. Well sorry, millions of them are used to having things now, and hundreds of millions more depend on all that trade. If our economy is trashed, so is theirs.

    Then it gets ugly. We close the border to Chinese trade, jack up the tarrifs etc. They retaliate etc. Point is there is no way they crash our economy, none.

    Still, the basic outline of your piece is correct. We are negligent to be so dependent upon foreign investments in our horrible overspending . We need to reclaim our economic independence

  7. Tom-

    I suppose that I meant in a historical perspective  (and recent history at that) China’s population has endured poverty like most “third world, developing nations” and thus could more readily revert psychologica lly to a state of having less than today’s American population could. But of course you are right in that thay now have a massive middle class that enjoys many of the “finer things” in life.

    However, I am not nearly so sure that the Chinese leadership wouldn’t start transferring their holdings into euros anyhow if they felt over-pressur ed by the US. Sure, they know they need our markets, but while the US is the world’s largest consumer market today, a precipitous economic downturn could quickly change that. And the inflated prices on Chinese goods (a lot of that crap is made for pennies) could be decreased and marketed to the rest of the world. India could easily replace us as a consumer market-they have money now, they have three times the people, and they’re a hell of a lot closer. (Just as an example)

  8. Yeah but if we go… so does India’s call centers. Where are they going to get the money to by Chinese stuff? Ever called DirecTV or SBC? Doesn’t fly with me Ken.

  9. Also if China or the Saudis started dumping bonds the resulting dollar crash would devalue the remaining bonds they are intending to dump. It would be cutting your nose off to spite your face.

  10. One thing most people don’t seem to take into account when discussing whether China itself could survive the affects of dumping US Bonds and dollars, is that the world economy has changed dramatically in the past 20 years.

    America has become a knowledge and service based economy and no longer produces manufactured goods to rhe rest of the world in the same way it once did. All those consuer items are now produced offshore—oft en in China.

    China has stepped in to replace America as a global supplier of durable goods. As long as there is a demand for those products in other countries and trading blocs, China can withstand any loss in business it may suffer as a result of one nation’s (the U.S.) trade sanctions.

    Could the same be said for the American Consumer withstanding the affect sof product scarcity and higher prices if he was suddenly cut off from cheap imports from China?

  11. This whole push on the PRC to take the lid off the Yuan has nothing to do with repairing the trade deficit and everything to do with the value of foreign direct investment. So, let’s not kid ourselves here. There is no way out of this. There are several scenarios…

    1) Slowly but surely we regain a better trade and accounts balance.

    2) Slowly but surely dollars are sold off until one day there’s a run on the dollar and America and much of the world experiences another depression.

    3) China says “to hell with it” and dumps dollars en mass, causing a global run, and America and much of the world experiences another depression.

    If we want to avoid the latter two scenes, try not voting for corporatist scum.

    JMJ

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