How To Hamstring a Hyperpower

The Weekly Standard ^ | 10/02/2003 | Irwin M. Stelzer

[Remember_Salamis]

Were you aware that China is systematically buying T-bills with money made off the trade deficit? right now, they're the 2nd largest holder of trasury bonds after japan. Why are they doing this you ask? Leverage -- the key to power.

If it wishes, China can sell it's t-bills and cause US interest rates to skyrocket, to especially high interest rates if the "herd mentality" of the world's financial markets follow suit (panick selling). What we'll have is a low baseline interest rate and an extremely high natural interest rate, where the US will be unable to cut interest rates to stimulate the economy, while defecits get extremely expensive due to high interest rates (defecits don't matter right now because interst rates are soo damn low. when they're high, we have to pay through the nose to borrow).

As a result of all this, the US must either (a) raise taxes and further constrict the capital markets or (b) cut spending -- military spending. See how it all works? China is strategiclly buying bonds in order to hurt our economy long-term if need be, as well as our capability to fund defense expenditures. And I guarantee you that the White House is well aware of this; It's been pointed out in the Weekly Standard Numerous times).

This leverage played out in today's meeting with wen jibao: we'll work with you on the Yuan (remnimbi) and NK if you'll publicly oppose moves towards Taiwanese Independence!

[Lurker]

Note to GW.

Repudiate foreign debt owed to China. All they have is paper, and they sure as hell don't have anyway of collecting on it. So to put it crudely 'f*** 'em.'

The Chinese Communists are the bloodiest killers left on the planet and we might as well deal with them now, or it will be damned harder to deal with them later.

We don't need their goods. The Indonesians, the Taiwanese, and the Indians will be perfectly happy to manufacture for us. In the long run, we'll be better off.

Tell the Maoists to ram it.

L

[Remember_Salamis]

It's sounds like a good idea, but the problem is that every body else would follow sout due to the "herd mentality" of global financial markets: one sells, they all sell.

Stand on principle, Dubya. William Kristol Wrote a good piece tonight. He had some good points on Fox news (Special Report w/ Brit Hume).

[Dan from Michigan]

If it wishes, China can sell it's t-bills and cause US interest rates to skyrocket, to especially high interest rates if the "herd mentality" of the world's financial markets follow suit (panick selling).

Same way George Soros broke the currencies in Asia, causing a ripple effect.

[Remember_Salamis]

Soros also hammered the British pound in 1992, causing the downfall of PM John Major's conservative government.

But this is the bond market, a little more stable than currency trading. However, that means a spike in bond rates would be especially destabilizing.

[MJY1288]

My question is this.....

Who would lose more if China pulled a stunt like that?

If we cut off all financial ties with China and refused to honor the paper they hold because of their manipulation practices, China's economy would crash in a way that would make 1929 look like a picnic

[Mo1]

Who would lose more if China pulled a stunt like that?

In the long run?? ... China does .. IMO, a stunt like this could screw them royally

[Destro]

This belongs in Editorials not in breaking news

[Remember_Salamis]

Not really. My point is we could NEVER refuse to honor PRC bank notes. Do you know why the rest of the world pours trillions into our bond and stock markets? because it's the safest investment in the world! We WILL always pay off investors and if that were to ever change, US financial markets would cease to be the center of global finances; Banking would shift bakc towarsd europe and Germany in particular, as it was before WWI and remains strong to this day.

In essence, the US would no longer be the best place to do business.

As for China, people fail to grasp that their "economic vacuum cleaner" isn't just pointed at the US, it's pointed at the rest of Asia as well. Did you know that "rich" Asia, i.e. Japan, Taiwan, and South Korea, and Singapore, are already using China's cheap labor because it even cheap for Asian standards.

As for export markets, China could shift towards the EU. And, it would be implssible to stop all PRC goods from entering the US. Why? becasue of the global supply chain. Chances are, most imports into the US were manufactured in multiple companies, For example, Japanese workers fanufactur high-tech, skill-intensive components for electronics, but then ship those parts to China for assembly before being sent back to Japan for finishing touches before going to Sinapore (Asia's #1 shipping hub) for final shipment. The point is, you cannot remove a cheap labor source like China from OUR economy without removing everone else. And only a tarriff war would do that. And if that happens, the marxist antiglobalizationists win.

So I ask, what do we do???

[Tailgunner Joe]

bttt

[RLK]

How To Hamstring a Hyperpower

------------------------------

We are not a superpower. The only thing we have is atom bombs and airplanes which are useless for anything but deluding ourselves or putting on a hollow show while we collapse internally.

[Remember_Salamis]

That kind of attitude gets Jimmy Carters elected.

[RLK]

Sitting in the vaults of China's central bank are hundreds of billions of dollars of Uncle Sam's IOUs.

-------------------

There is no way we can pay this off. With compound interes and the trade deficit, within five to ten years China will own the United States monetary system and will be able yo buils and support itself on the interest alone, leaving us a slave state to China. We're stuck in the equivalent of a loan shark juice operation of our own making.

[RLK]

That kind of attitude gets Jimmy Carters elected.

--------------------

How?

[RLK]

Sitting in the vaults of China's central bank are hundreds of billions of dollars of Uncle Sam's IOUs.

-------------------

Corrected for typos:

There is no way we can pay this off. With compound interes and the trade deficit, within five to ten years China will own the United States monetary system and will be able to build and support itself on the interest alone, leaving us a slave state to China. We're stuck in the equivalent of a loan shark juice operation of our own making.

[RLK]

China's economy would crash in a way that would make 1929 look like a picnic

-------------------

Why?

[lainde]

bttt

[Democratshavenobrains]

Weren't people predicting 15 years ago that Japan would own America by now?

[Heartbreak of Psoriasis]

I agree with your analysis, but would add that if interest rates shoot up, the panic would not be restricted to the financial markets.

Real estate prices would take a beating. Consider that millions of Americans refinanced their home mortgages at historically low interest rates based on highly inflated prices made possible by those very same low interest rates, and then spent that money buying consumer goods, including Chinese stuff at Wal-Mart.

When the bill comes due and interest rates go up, it would seem that great downward pressure will be placed on real estate values, as suddenly the banks who lent all that cheap money will realize that their security on the loans contains a whole lotta air. Panic is possible, as high interest rates cause a recession and layoffs driving mortgage borrowers into default and even bankruptcy.

If so, then cash will be king. If you have cash (especially Euros and Swiss Franks), then real estate can be snapped up on the cheap. Even if you don't have cash but have good credit or property to encumber, then there should come a time when interest rates are historically low (say, around 7%) and real estate is at rock-bottom prices.

If this analysis is right (and who knows?), then there may be a major real estate buying opportunity in the not-too-distant future. I'm arranging my finances around this. I'm now completely out of debt, and I'm holding foreign currency and a little gold.

I hope that all Freepers will get out of debt now, and get into real assets (and out of funny money Federal Reserve Notes).

I predict that things will look very different in about 18 months - about when the Fed's move Q3 2004 increase in interest rates should kick in.

Regards,

Heartbreak of Psoriasis

[JudgemAll]

IF China pegs its currency to US dollar yet has higher interest rates, doesn't it mean a boon for speculators and a dark spiral of value for any investment in Chinese Yuan?

Something does not add up.