By Paul Craig Roberts
08/08/07 "ICH" --- - 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."
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
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 6 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 regimes' 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
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
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
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
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.
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