Early this morning China let the idiots in Washington, and
on Wall Street, know that it has them by the short hairs. Two senior spokesmen
for the Chinese government observed that China�s considerable holdings of US
dollars and Treasury bonds "contributes a great deal to maintaining the
position of the dollar as a reserve currency."
threatens 'nuclear option' of dollar sales, by Ambrose Evans-Pritchard,
London Telegraph, August 9, 2007]
Should the US proceed with sanctions intended to cause the
Chinese currency to appreciate, "the Chinese central bank will be forced
to sell dollars, which might lead to a mass depreciation of the dollar."
If Western financial markets are sufficiently intelligent to
comprehend the message, US interest rates will rise regardless of any further
action by China. At this point, China does not need to sell a single bond. In
an instant, China has made it clear that US interest rates depend on China, not
on the Federal Reserve.
The precarious position of the US dollar as reserve currency
has been thoroughly ignored and denied. The delusion that the US is "the
world�s sole superpower," whose currency is desirable regardless of its
excess supply, reflects American hubris, not reality. This hubris is so extreme
that only six weeks ago McKinsey Global
Institute published a
study that concluded that even a doubling of the US current account deficit
to $1.6 trillion would pose no problem.
Strategic thinkers, if any remain who have not been purged
by neocons, will quickly conclude that China�s power over the value of the
dollar and US interest rates also gives China power over US foreign policy. The
US was able to attack Afghanistan and Iraq only because China provided the
largest part of the financing for Bush�s wars.
If China ceased to buy US Treasuries, Bush�s wars would end.
The savings rate of US consumers is essentially zero, and several million are
afflicted with mortgages that they cannot afford. With Bush�s budget in deficit
and with no room in the US consumer�s budget for a tax increase, Bush�s wars
can only be financed by foreigners.
No country on earth, except for Israel, supports the Bush
regime's desire to attack Iran. It is China�s decision whether it calls in the
US ambassador, and delivers the message that there will be no attack on Iran or
further war unless the US is prepared to buy back $900 billion in US Treasury
bonds and other dollar assets.
The US, of course, has no foreign reserves with which to
make the purchase. The impact of such a large sale on US interest rates would
wreck the US economy and effectively end Bush�s war-making capability.
Moreover, other governments would likely follow the Chinese lead, as the main
support for the US dollar has been China�s willingness to accumulate them. If
the largest holder dumped the dollar, other countries would dump dollars, too.
The value and purchasing power of the US dollar would fall.
When hard-pressed Americans went to Wal-Mart to make their purchases, the new
prices would make them think they had wandered into Nieman Marcus. Americans
would not be able to maintain their current living standard.
Simultaneously, Americans would be hit either with tax
increases in order to close a budget deficit that foreigners will no longer
finance or with large cuts in income security programs. The only other source
of budgetary finance would be for the government to print money to pay its bills.
In this event, Americans would experience inflation in addition to higher
prices from dollar devaluation.
This is a grim outlook. We got in this position because our
leaders are ignorant fools. So are our economists, many of whom are paid shills
for some interest group. So are our corporate leaders whose greed gave China
power over the US by offshoring the US production of goods and services to
China. It was the corporate fat cats who turned US Gross Domestic Product into
Chinese imports, and it was the "free trade, free market economists"
who egged it on.
How did a people as stupid as Americans get so full of
Craig Roberts [email him] was Assistant Secretary of the Treasury in the
Reagan Administration. He is the author of Supply-Side
Revolution : An Insider's Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the
co-author with Lawrence M. Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for Peter
Brimelow�s Forbes Magazine interview with Roberts about the recent epidemic of