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From your previous posts, I know you're a China hawk, and so am I. Economically (among other things), we've gotten ourselves into a pickle with China. Simply put, China is helping to finance our deficits, buying hundreds of billions of dollars worth of treasury bills every year. If we do not accommodate their mercantilist policies, THEY will not, and cannot, buy as many T-bills. If that were to happen, interest rates would go up as we would have to go out and find other buyers to fill their $100B/yr. appetite for Treasury bonds. Of course, this is nothing new; they are simply following the lead of Japan, the largest owner of US debt. Japan has been financing US deficits for years. Why do you think there was no trade war during Papa Bush's administration? Japan couldn't have bought as many T-bills, and the recovery would have been dampened with higher interest rates.

There's also the "Economic Weapon" theory, flouted by biggest of China hawks, most notably Aaron L. Friedberg from Commentary Magazine. Under this scenario, China is building up treasury bills as LEVERAGE. Say 10 years from now China owns $500B in US debt. A month before the PRC decides to reclaim Taiwan by force, they sell ALL of their T-bills. Panic ensues among other bondholders, and a stampede out of US securities occurs. Interest rates skyrocket, and the US is too concerned with domestic issues to intervene. Or, they could slowly bleed off holdings over a couple of years, causing interest rates to slowly rise and giving themselves a bit of deniability. However, even Mr. Friedberg doesn't think it will happen, as he compares the damage of economic weapons to nuclear weapons, and it could let a genie out of a bottle.

So, what do we do? Drastically cut spending to reduce our deficits while eliminating corporate taxes to revitalize our industrial manufacturing base.