China to Use Nuclear Option on US $$?

"That's always been a danger looming like a shadow over everything we've built here. But things have developed that will insure security. I've just made a deal that will keep the Empire out of here forever."

The UK Telegraph reports that China is dropping hints that it may attack the dollar's stability if the US doesn't do its bidding.

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.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

There seem to be about as many opinions of what would happen if China decided to flood the market with its dollars? as there experts. Being a natural pessimist, I am pessimistic about what it would mean for the US. But before you break out into a cold sweat over this, the writer of that article also has a blog, in which he comments trenchantly:

The longer the euro stays near $1.40, the more severe the coming crisis a year or eighteen months hence -- as the lagged effects of over-valuation turns boom to bust with even greater violence across Club Med. Sooner or later, the markets will twig in any case. The screams coming from southern Europe will be too loud to ignore. Worth noting that Goldman Sachs has begun to recommending "shorting" Italian and French bonds, expecting them to diverge further from German Bunds. This is exactly how the unravelling begins.

It will become obvious at some point that the euro-zone is just a glorified fixed-exchange rate system, not a sacred union. The euro is an orphan, stateless currency, lacking the mechanisms (a debt union, pension union, a shared treasury and fiscal transfers) that makes a currency union work over time.

Contrast that with the dollar, the currency of a nation forged by wars and the ancestral chords of memory (Lincoln's words) - all for one, and one for all. America is a country. (Again a Lincoln sentiment, but now a truism). That massive historical fact makes all the difference.

Ah, but there is the Japan, at last breathing again after its near-death brush with deflation. Now, I don't doubt that the yen will at some point snap back violently as interest rates (now 0.5pc) return to a semblance of normality. As soon as global risk appetite fades again, the yen carry trade will doubtless unwind - perhaps brutally as in 1998 - and some of that $500bn shipped overseas will come home.

That said, anybody who follows the rhythms of Tokyo's stock market must suspect that a sharp appreciation of the yen will cause the Nikkei index to plummet - bringing Japan's fragile expansion to a swift halt. The "Seven Samurai" exporters -Honda, for example, which earns 70pc of its revenues in America - will take a battering. As month after month of disappointing retail data this year keep showing, Japan lacks the demand growth to take the baton from America. Wages have fallen for the last five months in a row.

Japan is already the oldest society in the world, shrinking since 2005. The population peaked at 128m in 2005 and is expected to fall below 100m by the middle of the century. If - as expected - Japan's aging grannies and housewives raise the share of foreign assets in their portfolios from 3pc to 12pc over time, the yen must weaken further. It is the dying currency of a dying country -- albeit a most charming one.

Which brings me to China, a country that is growing old before it ever becomes rich. The working-age population peaks in 2015 - just eight years time. China then dives into the steepest demographic decline ever known by any nation in peace-time. As for China's current boom, you need only know three things so see where this is going: credit is being channelled for political purposes through Communist state banks that are not subject to market discipline; almost half of GDP is going on investment, leading to a glut of factories; return on that investment, measured by the incremental capital output ratio, is 4.4. Much of it is being wasted. Compare that to Japan (3.2), South Korea (3.2), and Taiwan (2.7) during their growth spurts. China is not going to take over the world economy, now or ever. The window will close shut before they get there.

No, the 21st Century will be the American century, just like the 20th Century. Americans may have to tighten their belts a bit after all the sins of Alan Greenspan and the Clinton-Bush debt generation. But the dollar will still be the world's reserve currency long after the euro has disappeared and the yen has been forgotten... Now, the Indian Rupee? Hhm. Another day.

Recently the Council on Foreign Relations released a new report outlining how the Establishment reads China: badly, according to Arthur Waldron. It's difficult not to reach for comparisons of the English elites and their acceptance of Nazi Germany as a normal state, with only a smattering of British right-wingers, like Churchill, grasping what Nazi Germany really was.

Just for fun, enjoy Dennis Kucinich's witty comment about our China policy at Crooks and Liars:

some of my friends here up on the up the stage actually voted for Most Favored Nation...now as President my most favored nation is America. Now I want to say that when I was growing up in Cleveland there was a myth that if you dig a hole deep enough you'll get to China.

We're there. [LAUGHTER]

And we need to have a president who understands that and is ready to take a whole direction on trade with China. Thank you.....

[Taiwan] [US] [China]