this morning (August 8) 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 Chinas
considerable holdings of US dollars and Treasury bonds "contributes
a great deal to maintaining the position of the dollar as a reserve
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."
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.
precarious position of the US dollar as reserve currency has been
thoroughly ignored and denied. The delusion that the US is "the
worlds 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 US$1.6 trillion
would pose no problem.
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.
thinkers, if any remain who have not been purged by neocons, will
quickly conclude that Chinas 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 Bushs
China ceased to buy US Treasuries, Bushs wars would end.
The savings rate of US consumers is essentially zero, and several
million are afflicted with mortgages that they cannot afford.
With Bushs budget in deficit and with no room in the US
consumers budget for a tax increase, Bushs wars can
only be financed by foreigners.
country on earth, except for Israel, supports the Bush regimes
desire to attack Iran. It is Chinas 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 US$900 billion in US Treasury bonds and other dollar
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 Bushs war-making
capability. Moreover, other governments would likely follow the
Chinese lead, as the main support for the US dollar has been Chinas
willingness to accumulate them. If the largest holder dumped the
dollar, other countries would dump dollars, too.
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 Bushs wars.
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.
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.
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.
did a people as stupid as Americans get so full of hubris?
Paul Craig Roberts was Assistant Secretary of the Treasury in
the Reagan administration. He was Associate Editor of the Wall
Street Journal editorial page and Contributing Editor of National
Review. He is coauthor of The
Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com
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