China threatens 'nuclear option' of dollar sales

[LorDiego01]

Maybe somebody who's a little smarter and more educated in financial and economic matters than myself could shed some light on whether this is just international level B.S. meant to keep us worried about some other shady deal going on, or whether its time to start buying wood to board up the windows and make sure all the guns are clean and properly working.


http://www.telegraph.co.uk/money/mai...nchina107a.xml

Originally Posted by Ambrose Evans-Pritchard

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
# Blog - Dollar to collapse?

Fistful of dollars - China threatens 'nuclear option' of dollar sales
Fistful of dollars - China's trade surplus reached $26.9bn in June

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week 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 added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".

She said foreign control over 44pc of the US national debt had left America acutely vulnerable.

Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.

A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.

The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.

Henry Paulson, the US Tresury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".

Mr Paulson is a China expert from his days as head of Goldman Sachs. He has opted for a softer form of diplomacy, but appeared to win few concession from Beijing on a unscheduled trip to China last week aimed at calming the waters.

Also, in my opinion, a collapse of the dollar would make 80% of Americans BEG for a North American Union as well as its proposed currency, the Amero......

[MarcS]

china could very well collapse the dollar, though it seems the fed is doing a pretty good job of that on their own.

[RandomTask]

I called this about 5 years ago, along with the dangerous goods coming in from China and harming us, except that back then I figured it would be more like anthrax spores inside HotWheels cars blister packs.
We could be turned into a third-world country in a week without a shot being fired.
Now back to watching American Idol.

[dgg9]

http://andrewsullivan.theatlantic.co...ry-meltdo.html

Blog entry by Bruce Bartlett. Excerpt:

"But the most important reason why China will not retaliate the way conspiracy-mongers like Evans-Pritchard think is because the Chinese would suffer a massive capital loss if they tried to hurt us by dumping their dollars. That is because their dollars are not sitting around in wads of $100 bills, but fully invested in U.S. Treasury bonds. Bond prices go down when interest rates rise or there is a threat of inflation that would erode the value of the bond's principal.

If China started heavily selling its bonds, the added supply on the world market would cause interest rates to spike. If investors started to become concerned about our ability to finance our debts, it could cause the dollar to plummet, which would further depress bond prices. How much bond prices might fall under such a scenario cannot be estimated. But China would certainly suffer capital losses on its bond portfolio of tens of billions of dollars and possibly much more."

[MarcS]

I think that's why they're calling it the "nulear option" No one really wins, but we're way worse off.

[Broomhandle]

Better it happen sooner than later....

[ChamberedRound]

I'm not an economist by any means, but this is how I'm seeing the current situation; take it FWIW.

We've been borrowing MASSIVE amounts of money from China to fund the war in Iraq. If they decide to call in the loans, and we can't pay, the dollar will crash because the world markets will have no faith in it. In addition, if we can't pay and they decide to sell their dollar holdings, they'll flood the currency market with US dollars and the dollar's value will crash.

In addition to borrowing money, the Federal govt. is also printing more money, inflating the dollar and hence reducing it's value. Inflationary pressure is an ever-present force in a fiat currency system where the government has no check against arbitrarily printing more money. This is one of the reasons why some economists and politicans (like Ron Paul) advocate the return to a system where the dollar is backed by specie, i.e. gold; if the government tries to print too much money and overly devalue the dollar, people can turn in the notes for an equivalent amount of gold. It forces the government to adhere to the will of the people; when the Fed sees the potential for a "run" on its gold stores, they stop printing more money.

As a result of all this money being printed and borrowed, the economy is naturally trying to compensate. In addition to the government borrowing from other countries, lending institutions have been lending money to people who can't afford the amounts they're borrowing. These loans are now being defaulted on, which is causing the sub-prime lender market to fall and is also causing a shortage of liqidity (available cash) in the economy, which actually deflates the currency. This was the cause for yesterday's drop in the stock markets; in fact, this liqidity shortage affected markets worldwide, not just the US market. This type of stagnation "spooks" individuals and institutions to stop investing and save their money, which actually further deflates the currency. This type of correction, however, is usually accompanied by a huge slowdown in the economy at large, causing job losses and the like.

As a response to what's going on in the sub-prime market, certain government's banks (like the Federal Reserve) are injecting some more money into the economy to keep things going.

For those interested:
http://en.wikipedia.org/wiki/Fiat_currency
http://en.wikipedia.org/wiki/Inflation

[D-FENS]

Originally Posted by ChamberedRound

In addition to borrowing money, the Federal govt. is also printing more money,

The Fed Gov isn't printing the money, the Federal Reserve is.

We're is extremely dangerous territory with our National Finances. Last years budget deficit was 1.3 trillion dollars, though, the Bush Administration has abandoned Corporate Accounting rules so it only appears to be ~250 billion. The new rules only account for money actually spent and not for money committed.

I'm scared shitless. No joke. If anyone doesn't think they might wake up in the 3rd world in the next five yearsa9or 6 months), they're not only naive to what's going on, but ignorant to it as well.

52% of Americans rely on FedGov spending for their income. The only 48% - Unemployed will find their wages, if there are any, to be worthless.

[MarcS]

I'm glad i took 80% of my college fund out of the market at the beginning of summer. I'm now strongly considering putting a good chunk of it into precious metals. As poor as the dollar is doing against gold and silver (and everything), i can only see it getting worse in the foreseeable future.

[RoyJackson]

Originally Posted by dgg9

http://andrewsullivan.theatlantic.co...ry-meltdo.html

Blog entry by Bruce Bartlett. Excerpt:

"But the most important reason why China will not retaliate the way conspiracy-mongers like Evans-Pritchard think is because the Chinese would suffer a massive capital loss if they tried to hurt us by dumping their dollars. That is because their dollars are not sitting around in wads of $100 bills, but fully invested in U.S. Treasury bonds. Bond prices go down when interest rates rise or there is a threat of inflation that would erode the value of the bond's principal.

If China started heavily selling its bonds, the added supply on the world market would cause interest rates to spike. If investors started to become concerned about our ability to finance our debts, it could cause the dollar to plummet, which would further depress bond prices. How much bond prices might fall under such a scenario cannot be estimated. But China would certainly suffer capital losses on its bond portfolio of tens of billions of dollars and possibly much more."

Anyone who believes China wouldn't do this is a fool. Short term (relatively speaking) losses vs. long term gains is in China's interest. Long term gain, in this case, is geo-political power.