Wednesday, August 08, 2007

Of Dollars and Dragons

File this one under I told you so:

From the Telegraph:

China threatens 'nuclear option' of dollar sales

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.

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. more

Now the odds of China dumping that much at once are slim to none as they need our market to be reasonably healthy and our investment capital to flow freely to fuel their growth However the fact remains that we have allowed ourselves to be put in a position where our economy can be held hostage. We're now in a position where China can easily dump a billion dollars worth of bonds and shake our economy up a little as a negotiating technique. Not a pretty picture.

By allowing China to bankroll the war on terror we have effectively given them the ability to conduct economic terrorism against us at will. Not exactly what I'd call a fair trade.Its another way in which this war has been conducted in a very shortsighted manner. Because as any CFO will tell you diversification of debt is almost as important as diversifying one's investments. Especially if your loan shark happens to be a dragon.

H/T to Memeorandum