China Pulls Out The Heavy Ammunition!
According to the Telegraph,
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.
China has been subsidizing the consumption of the US consumer & homeowner to the tune of nearly $1 Trillion. They send us all kinds of stuff and in return we give them pieces of green paper that aren’t really backed by anything, except the promise to pay more of the green stuff!
And now, to appease special interest groups clamoring about loss of manufacturing jobs, our ‘faithful’ senators are trying to pass a bill enacting trade tariffs against China in retaliation for currency manipulation. The good thing about special interest groups are that they are usually represent single-agenda constituents. The politicians give them the one thing that they want, and they’re assured their vote. And if they can spread the cost of giving them the thing they desire over a large base, less people are likely complain.
In this case, the cost is higher inflation for all of us. And if China follows through with its promise, you’ll see much higher interest rates that will negatively affect the housing industry and the economy pushing us into recession.
We’re currently experiencing an economy divergence. A poor country like China is lending money to our government by buying our Treasury notes. You could say its effectively funding our government spending. This is enabling us to enjoy the low-interest environment of the past several years.
This is not a normal occurrence. Typically rich countries lend money to poor countries. This phenomena should result in a natural rebalancing of the currencies where China’s currency strengthens against the US Dollar. Given time, this will occur without any help from our politicians.
Henry Paulson, the US Tresaury Secretary, said any such sanctions would undermine American authority and “could trigger a global cycle of protectionist legislation”.
Yet another example of why the government shouldn’t interfere in economic policy. It usually never does any good, it creates friction and the burden always falls on the tax-payer.
Meanwhile, Hillary Clinton in a show of brilliance said
foreign control over 44pc of the US national debt had left America acutely vulnerable.
Great, maybe Bill can fork over the $50 million he’s made and buy up some of it.
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August 10th, 2007 at 2:51 pm
Thank god the Chinese government stepped up to loan us money to pay for our tax cuts and the Iraq War!
Unless taxes go up, how do you suppose we are going to pay them back? Ask the wealthy to donate?
August 10th, 2007 at 3:00 pm
actually, i think the government needs to reduce its spending.
there was just a news report that the federal deficit is surprizingly lower due to record tax collections.
if you raise rates, the wealthy will always find ways to avoid paying them – the middle class will likely be squeezed instead – just look at AMT as an example of this.
I feel the only solution is reduced government spending – the government currently employs 1% of the US population. thats waaaay too much. plus considering that they get excellent salaries, benefits and pensions its just too much money.
August 12th, 2007 at 7:42 am
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