Posted on 07/28/2008 9:23:30 AM PDT by BGHater
Four years ago, when the foreign-exchange reserves of China totaled about $450 billion and the value of China's holdings of U.S. securities was about $300 billion, former Treasury Secretary Lawrence Summers warned about the emergence of a global "balance of financial terror."
Mr. Summers and others worry that U.S. consumption and investment levels are becoming dependent on "the discretionary acts" of other governments. Foreign governments and investors are accumulating huge pools of dollars by virtue of the massive trade deficits the United States has been running. What these governments decide to do with their rapidly growing dollar reserves could have a huge effect on the U.S. economy.
"There is surely something odd about the world's greatest power being the world's greatest debtor," Mr. Summers told the audience gathered at the Peterson Institute for International Economics in Washington.
"It surely cannot be prudent for us as a country to rely on a kind of balance of financial terror" that exists today, he said.
Since Mr. Summers' March 2004 speech, the United States has racked up an additional $1.2 trillion in budget deficits and about $3 trillion in trade deficits, including more than $900 billion in merchandise trade deficits with China alone.
China's currency reserves have kept growing since 2004, in tandem with its ever-expanding trade surpluses and foreign direct investment, which has built many of China's export-generating factories. So-called "hot money" has also been pouring into China seeking to reap the gains from its slowly appreciating currency.
Not surprisingly, China's foreign-exchange reserves have soared, quadrupling from $450 billion in early 2004 to more than $1.8 trillion today. The International Monetary Fund expects China's currency reserves will exceed $2.4 trillion by next year.
(Excerpt) Read more at washingtontimes.com ...
I know Red China holds a lot of our bank notes of our debt and so on, but I think there will be a time when we might have to “be not afraid” (with respect to the late Pope, John-Paul II) and tell them to “buzz off” and deal with the consequences.
That's about as odd as the family with a 50 room mansion having the largest mortgage in a neighborhood of two bedroom townhouses.
Much is explained by Nixons’ going off the gold standard with Bretton Woods II when we went to a fiat currency, then ‘playing the China Card’, then the US creating credit derivatives and Forex trading, advancing ‘debt capitalism’ by supporting vast and increased spending by T-bill ‘sales’. A current piece on ‘debt-capitalism’ is by Liu at...http://www.atimes.com/atimes/Global_Economy/JG22Dj06.html
That kind of economic blackmail only works if the US is stupid enough to bankrupt its citizenry in favor of paying off its financial obligations to other nations like China.
Given a choice of defaulting on trillions of dollars of debt held by hostile nations or a public uprising that targets the political elite that destroyed everyone’s livelihood and assets; who’s willing to bet against giving China the finger during a conflict?
After all, both liberals and conservatives will suffer terribly with hyperinflation and devaluation - not even the most fanatical liberal will pretend everything’s peachy when his house’s value plummets by 95% and a loaf of bread costs $200.
What most people don’t realize is China’s screwed with the current arrangement - no matter what it does, it loses in any financial war. If it stops buying US bonds, the market gets scared and the dollar devalues, reducing the value of China’s holding. If China starts withdrawing, even slowly, the dollar’s value plunges even faster, resulting in China’s remaining holdings to be worth much less. If it attempts to withdraw anything over half of their holdings, the US merely defaults, and China’s holding a trillion dollars of worthless electronic IOUs.
What then is China’s recourse? An embargo? So what? It will only take six months for the US to ramp-up its manufacturing capabilities whereas China faces mass starvation from the loss of US food exports. They can’t exactly eat what comes out of their export factories. A further advantage of the US is the continual development of Rapid Prototyping, Rapid Manufacture, and 3D Printing, which allow virtually any part to be manufactured anywhere. A US-China trade war inevitably results in the US becoming much more self-sufficient and with a much better balance sheet.
In short, don’t panic - even if the worst happens, the pain won’t be fatal and the US emerges much better and much stronger than ever.
So is it with China. Should they ever use their "chip" it will wipe them out along with us.
There is an old saying; if you owe the bank a million dollars the bank owns you, if you owe the bank a billion dollars you own the bank. China is not in a position to call in our debt without risking losing far more than they gain or at least losing more than they can afford to lose.
Your ‘free trade’ dollars at work.
The old tale is that if you owe the bank a little bit, the bank controls you. If you own the bank a huge amount, you control the bank.
It's the very size of the debt that should give us leverage with China.
Ain’t that the truth!
I’m surprised that some of you see it in that way.
I don’t think any of us understand or fathom the breadth of the problems that could become if our currency collapses and inflation spirals out of control.
China pegged it’s currency to ours, and we told them to let it float.
Dubai has already thought about unpegging from the Dollar since they are “importing inflation.” I question just how much we can continue to pull Wall Street Big Banks out of their gutters and expext the average citizens to remain “average.” Our purchasing power has already been hit upon with increased food, energy, and fuel costs. The fact that we are a consumer nation and don’t save anything (majority of households have a negative savings rate and spend more than they make) is a problem.
I don’t know, I just have a bad feeling the more I read about this stuff. Remember, every Empire must die, and unfortunately, history points this out.
China may be surprised to find that holding so much of our debt actually gives us control over them.
When they dumped 10% of their T-bills last year to punish the USA for wanting the yuan to float all they did was massively write down the value of their remaining holdings.
As the old saying goes, when you owe the bank $100,000 the bank owns you.
But when you owe the bank $100,000,000 you own the bank.
We continue to need _more_ debt by the hundrends of billions. Yet you imagine that somehow that give a persons or a country an edge? This country will completely collapse without constant borrowing or foreign debt purchasing to ease our twitching addiction to debt.
You and obviously those running the country are making deals with the devil. Your play is endangering my country, my life and my childrens future.
In short, please be quiet if you only plan on backing up the monied interested.
“I know Red China holds a lot of our bank notes of our debt and so on, but I think there will be a time when we might have to “be not afraid” (with respect to the late Pope, John-Paul II) and tell them to “buzz off” and deal with the consequences.”
Mythbusters
1. We are not beholden to China BECAUSE they invest in U.S. Treasury Notes. U.S. Treasury notes are auctioned and, to the extent that China holds any number of them, THE CHINESE BID MORE than some of the other prospective buyers during any particular auction. Got it. It’s NOT that there were NO OTHER BUYERS - the Chinese (and others) bid (offered to pay) more than some other buyers; that’s all.
2. The Chinese reason they invest in U.S. Treasury notes is because Chinese companies earn so many dollars from Chinese exports to the U.S. that (1) China’s central bank translates some of those dollar denominated earnings into local currency by buying U.S. Treasury notes (and other dollar denominated investments) and paying the equivalent value in China’s currency to China’s exporters; (2)or holding the U.S. depository notes in its central bank (cash and equivalent in foreign reserves) and issuing the equivalent value in China’s currency to the exporters. In other words ‘dollar’ investments are simply one way China’s central bank translates the value of it’s exporters earnings into value that can be returned to the local economy. In other words, the cause of China’s investment in dollar denominated investments DEPENDS ON Chinese exports. That DOES NOT MAKE THE REVERSE TRUE - dollar denominated investments are NOT dependent on the Chinese buying them. They are NEEDED by the Chinese. They are neutral to us. If the Chinese were not outbidding others for them, others would buy them.
3. The Chinese have no political or financial interest in trying to participate in a precipitous decline in U.S. dollar denominated assets that they hold - it would be, a financially self-defeating process - causing the devaluation of the foreign reserve holdings of their own central bank, causing a short-term and minor devaluation in their own currency and yet, also, politically and financially self-defeating because it would result in a quick international re-adjustment in the currency market value relationship of the U.S. and Chinese currencies which would very greatly raise the value of the Chinese currency, in relation to the dollar and that rise might even drastically hurt China’s manufacturers by making Chinese exports much higher priced in the U.S. and elsewhere; killing the export basis of its economic growth.
Ain’t gonna happen.
What will happen will occur slowly, over a decade or two.
China’s currency will eventually rise, in relation to the dollar. As it does its export surplus with the U.S. will decline, as will its central bank’s holdings of U.S. Treasury notes. Some other new, young, export powerhouse - hoping to reach the economic heights of the U.S., China and others, will see the U.S. import market as one path on their journey to progress, obtain a trade surplus with us and, due to the funding needs of that trade surplus, have its central bank buy U.S. Treasury notes (and other dollar denominated investments). Then, some of you will be complaining that we are in danger because The Philippines or Mozambique hold so many U.S. Treasury notes.
There the correlation stops, since the influence of trillions of dollars is much heavier than just buying government debt. China and the Islam are buying our corporations, politicians, judges and laws; whether covertly or through proxy. This is a hard one to grasp, but the truth will be heard or re-synthesized by many not caught up in the gains to be made by selling out (joining the free-for-all).
The China-US economic relationship ties both nations. Americans want to buy cheap crap at Wal Mart so Wal Mart buys cheap crap from China. Which employs tens of millions of Chinese. While I do not care to see American dollars going to prop up a Communist regime, the fact of the matter is that they are simultaneously destabilized by having their nation addicted to buying our debt in order to facilitate our being able to buy their goods. Our economic fortunes in the current recession are hitting China, too.
Since we are still the world's currency, I suspect there will be other unpredictable, horrible downside ramifications that we cannot imagine.
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