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Generational Dynamics Web Log for 9-Aug-07
China threatens the economic "nuclear weapon" against the United States

Web Log - August, 2007

China threatens the economic "nuclear weapon" against the United States

As xenophobia grows in Congress, China discusses retaliation.

With China holding hundreds of billions of dollars of US Treasury bonds, some Chinese officials are now talking about using what they call the "nuclear option": Dumping all these US bonds on the market in order to cause the US dollar to crash.

The first threat was carried by Xia Bin, Finance Chief at China’s Development Research Centre, saying that Beijing's foreign reserves should be used as a ‘bargaining chip’ in talks with the US. "Of course, China doesn’t want any undesirable phenomenon in the global financial order," he said.

The threat took further shape in an article in China Daily by He Fan, at the China Academy of Social Sciences, on Tuesday:

"Thanks to the trade surplus, China has accumulated a large sum of US dollars and its world largest foreign exchange reserve is mostly in US dollars. Such a big sum, a considerable portion of which is in the form of US treasury bonds, contributes a great deal to maintaining the position of the US dollar as an international currency.

Russia, Switzerland and several other countries have restructured their foreign exchange reserve and reduced the US dollars they hold. China is unlikely to follow suit as long as yuan's exchange rate is stable against the US dollar.

The Chinese central bank will be forced to sell US dollars once the renminbi appreciates dramatically, which might lead to a mass depreciation of the US dollar against other currencies."

In one sense, the Chinese threat is purely political.

Congress has been getting increasingly xenophobic about China, and risking a major confrontation and retaliation of some kind anyway.

Congress has been blaming America's economic problems on China. Those evil bastards lent us hundreds of billions of dollars in money, at little or no interest, then manufactured millions of products that we could buy from them, in order to make our lives more comfortable. It's not our fault that we practiced credit debauchery and went into humongous debt that we now can't pay off; it's THEIR fault, for having a "savings glut." We're just pooooooooooor, innocent victims here, taken advantage of by those nefarious people in a faraway land.

Of course, that's not how the Chinese look at it. From their point of view, they did what we wanted them to do, and they sacrificed a great deal of their own standard of living to loan money to us. And now that they've made those sacrifices, the Americans are calling them "currency manipulators."

Thus we see the xenophobia growing on both sides. Congress is moving to condemn China and pass sanctions on China, because they're nefarious currency manipulators.

China is saying, "What the hell are you talking about? We've got you by the balls. You guys don't even have any money - we've got all your money. And we're going to use it against you if you don't stop all these accusations."

Thus grows the level of xenophobia on boths sides.

There has been a lot of commentary on the internet and in news programs about this new Chinese threat. The tenor of the commentary is that neither side would ever go through with its threats, because they would hurt their own economies.

That's true, and yet that hasn't stopped people before. In 1930, Congress passed the Smoot-Hawley Tariff act, primarily targeting Japan, but theoretically "protecting" American jobs by taxing imports from any foreign nation. Economists and the Hoover Administration were dead set against this measure, saying it would hurt the American economy -- which it did do -- but the warnings were to no avail, and an infuriated Japan eventually bombed Pearl Harbor.

A web site reader said, in an e-mail message today, "This is an economic version of Mutually Assured Destruction, which some may remember was the nuclear Armageddon logic that held things together during the Cold War with the USSR."

He added that the fact that we have a close business relationship with China does not guarantee that we won't have war with China:

"The US was [economically] integrated with Germany and Japan prior to WW2. In fact, business notables from Henry Ford to Joseph Kennedy to George Bush's grandpa, Prescott, to IBM, GM, Chase Manhattan, Standard Oil, Dupont, GAF, and AT&T were all in bed with the Nazis even throughout the war. Goodyear ran the Auschwitz slave-labor rubber factory with IG Farben, Chase Manhattan Bank was selling the dental bullion from the gas chamber victims, IBM was running the databases that tracked the ID numbers tattooed onto the concentration camp prisoners, Ford and GM built tanks for the Nazis, AT&T built planes, Standard Oil shipped oil (via Panamanian flagged tankers), Dupont and GAF made the gas for the gas chambers.

So, just because almost all the clothes on your back, the computer under your fingertips, the popcorn shrimp in your mouth, the loan that paid for your house, and the money paying for both the Middle East wars and Medicare all came from China, do not assume that war between the US and China is impossible.

Every blowhard trade/job protectionist from Lou Dobbs to Hillary Clinton is putting a flame torch to the fuse of the next world war."

In fact, both sides are on the road to war. China has been planning for war with the United States for 15 years, rapidly increasingly its military capabilities, and repeatedly making specific war threats with respect to Taiwan. From the point of view of Generational Dynamics, China and the U.S. are headed for a genocidal crisis war with near mathematical certainty, and nothing can be done to stop it.

But what about this economic "nuclear option" threat? What would happen if China dumped all its US Treasury bonds on the market?

I actually wrote about this several months ago in an article entitled "Where should I put my money?"

"There are more than two trillion dollars of these long-term bonds sitting in central bank vaults around the world, especially in Japan, China and the UK. Furthermore, this amount continues to grow exponentially. As a result, "everybody" knows the U.S. Treasury will never be able to redeem all those bonds.

People tell me, "Of course they'll all be redeemed. The Treasury can print as much money as it wants, and it could redeem them all tomorrow."

But my intuition tells me that when the world is flooded with some trillions of some particular item, and that the number of trillions keeps growing exponentially, and that those trillions of items could go on the market at any time, then those items may turn out not to be very valuable.

During a crisis or a war, China or another country may put several hundred billion dollars worth of these long-term bonds on the market in order to destabilize the American economy. At that point, if you happen to have some of these bonds, they'll be worthless.

So, if you're going to buy Treasury bonds at all, the best bet is probably short-term, 6-month Treasury bonds."

China's economic "nuclear option" is a real threat, and I have no doubt that as the Clash of Civilizations war approaches, China will use it. Why wouldn't they? (9-Aug-07) Permanent Link
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Generational Dynamics Web Log for 9-Aug-07 China threatens the economic "nuclear weapon" against the United States

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Generational Dynamics Web Log for 9-Aug-07
China threatens the economic "nuclear weapon" against the United States