Don't tell me that they only thought that the Chinese might do something like that now, it's not as if that wasn't a predictable move.
Of course the Chinese will use US debt as a weapon, just like the US would use it if the situation were reversed.
Don't forget that Russia crashed because of being unable to keep up with the spending patterns of the US, not because of some moral overweight or military pressure. Their economic structure wasn't capable of matching the US and the Afghanistan war (the previous one, the one 9/11 was an outgrowth of) sealed the deal.
The US is in between a rock and a hard place economically when confronted with China, a massive sell-off could destabilize the dollar to the point that traders would favour other currencies (most likely the Euro), and that would accelerate the fall. If you live in a glass house you should not throw with stones.
"a massive sell-off could destabilize the dollar to the point that traders would favour other currencies (most likely the Euro), and that would accelerate the fall" >> I understand that you mean the fall of China. Can you elaborate?. How will traders favouring Euro is going to crush china?. (If they have already sold of the Treasurey Bonds, that is).
If China declares unrestricted war, and attempts to use debta as a weapon, we have a very simple response: "Dear world, all T-Bills we sold to China are hereby repudiated in response to their hostile acts."
Or, to paraphrase: When you owe China $1000, you've got a problem. When you owe China $800 billion, China has a problem.
How would that work exactly? China starts selling t-bills. Selling to whom? Buyers. Now non-Chinese buyers have the bills. Are those bills repudiated? Also, since the sell-off is a legitimate threat, it seems to follow that the market for t-bills is so liquid, that repudiating those bills belonging to one entity would be technically impossible.
T-Bills are tracked via the book entry system. I.e., the Treasury keeps a registry of who owns what debt. So all we need to do is repudiate all the debt that China currently owns. Then there will be no buyers.
all we need to do is repudiate all the debt that China currently owns
At which point every other holder of U.S. Treasuries will wonder "Am I next?". This will lead to a massive sales of U.S. debt instruments around the world, and would not be good for anyone.
So China engages in open hostilities against us, and we tank their bonds.
Now UBS will worry we will do the same to them, perhaps in response to Switzerland becoming hostile? Nomura dumps our bonds in anticipation of Japan going all 1942 on us?
China also really can't afford to lose its accumulated savings, since they'll need every saved dollar to deal with the massive demographic problems caused by the one child policy.
While the U.S. short term demographic issues will be bad when the baby boomers retire, the changes are going to be even more extreme in China. When their population ages enough, those accumulated savings will be absolutely critical: http://brontecapital.blogspot.com/2010/02/globalizing-austra... .
At which point your currency/bonds are worthless to everyone who doesn't have to pay taxes with them since you look for reasons to break your promises when things don't go your way.
A single repudiation in response to hostile acts, which occurred once in 80 years will certainly make everyone dump US debt?
I doubt it. Maybe we will be downgraded from AAA to AA, but I doubt we would see more than that. In contrast, China would lose $600-800 billion and anyone else who wants to use debt as a weapon would think twice.
I think you're underestimating the effect of the US pulling something like that. One of the main pillars of the US's strength is the absolute reliability and inviolability of its government debt. Attempting to unilaterally annul that debt, and for such capricious reasons, and I imagine the consequences would be both immediate and profound.
You're misunderstanding something here, the selling off of the T-bills and other US dollar valued assets would be the extent of the hostilities. The rest will take care of itself.
Agreed with yummyfajitas: anyone who expects that the promises of financial instruments between belligerents will be honored in the case of war is delusional.
China will use this as a negotiation point to further their agendas. The US has used this tactic before, notably in the Suez Canal crisis to keep Britain and France from attacking Egypt:
It's not in the best interests of China to cause massive inflation of the US Dollar, but it definitely gives them the ability to put short-term pressure on US politicians.
At the State Department, spokesman P.J. Crowley dismissed the economic threat as potentially self-defeating. "That would be biting the nose to spite the face," Mr. Crowley said. "The economies of the United States and China are intertwined."
The effect will be to lower the dollar value which would be good news. (That is how Argentina came out of its Debt Crisis). It will also drive manufacturing back to the United States, where it belonged in the first place.
I always advocated that America should have imported the cheaper labor - like it did for many years - rather than exported the jobs.
Bottom line wish for it, if you live in the States.
It wouldn't change the real value we have to pay externally for oil and so on.
It's my semi-vague understanding that "competitive devaluations" don't work well. If by citing Argentina you're implying this is a solution to our debt problem ... well, that would be totally catastrophic in a nation where something like 70% of the wealth is in financial instruments. When countries cancel their debts by inflation, they also tend to "cancel" their system of government (i.e. it gets replaced, as happened in the US with the Continental Congress ("Not worth a Continental")).
It wouldn't change the real value we have to pay externally for oil and so on.
Most of the oil producing countries have currencies pegged to the dollar and politically they are bound to stay with it. If you have a low dollar Chinese goods will become more expensive and consumption will go down. America wants a stronger Chinese Yuan and has been pressurizing the Chinese for this - in efect if the Chinese dump dollars America's wish will be granted. (A similar move saw America out of the First Oil Crisis).
I thought the problem with the "Continental" currency was that it got devalued due to the British forging large amounts.
"Peg" is a wrong word to use here, it's got the wrong connotations.
Oil is priced in dollars: if you want to buy oil on the open market/from an OPEC nation, you have to pony up dollars to buy it. That says nothing about how many dollars are required ... e.g. look at what happened starting in the early '70s when Nixon closed the gold window. (I must say it's nice to be on a forum where I can reasonably expect people to know such references.)
As for your second paragraph in toto ... I'm not sure the linkages will work that way.
As for the Continental problem ... yeah, you could be right, I've certainly heard that was a factor, but the bottom line remains the same.
The Gulf currencies are literally pegged to the Dollar. It's a fixed rate for the last 5 years that I had dealings with them (Qatar, UAE, Bahrain, Kuwait etc). But I agree nothing stops oil prices sky-rocketing.
I must say it's nice to be on a forum where I can reasonably expect people to know such references
Best forums on the web on any topic and to top it very civilized:)
Sorry about that, I didn't know the Gulf states had actual pegs (they were omitted from a list I'd recently read) and therefore misread your starting sentence.
However if the US$ started a sharp secular decline unrelated to anything happening in the Gulf (suppose the Fed uses QE to fund the Federal deficit for too long), they could change their pegs and I would imagine that in and of itself wouldn't be viewed negatively.
(Of course in such an event there would be so much financial chaos... well, "Sufficient unto the day is the evil thereof.")
Uhm, what? For a developed country, the US has very cheap labor already. And there are minimum wages laws to deal with as well. How exactly would the US compete with labor as cheap as it is in China?
I can't imagine you actually mean slavery here (and I'm not convinced that would be cheaper in any case, morals aside), but I don't know what you could mean.
The dollar-denominated cost of unskilled labor in the US can’t get much lower, but if the dollar-to-[insert some foreign currency here] exchange rate goes down, then US exports will become cheaper when denominated in that foreign currency.
On most manufactured goods the labor component is not as high as people think. Assume an industry where the labor portion is 30%. By a combination of a lower dollar value as well as better efficiencies and better automation it is not unlikely to end up with a product which is perhaps within a 15% difference of a comparative Asian one. A 15% difference will easily be marketable for a better quality product. (If you factored transportation costs it even looks better).
I don't mean slavery, I believe in a living wage, but I am sure if one does the sums there are a lot of industries that could be rejuvenated if policy could be redirected properly.
One of the problems of the US is its large internal market which resulted in the average US firm not to be geared for exports. This also needs to be addressed. Let me give you an example, I worked in Dubai three years back (large construction industry) on an average quote for machinery that typically goes into large buildings say Fire Pumps the range of prices would be:
US 100K (non-negotiable)
US 90-105K (European very negotiable)
Asian 85K (negotiable)
Order placed normally with European firm for US 88K
Any factory with not a full order book could marginally cost the products and have a full order book.
Ok, fair enough. I suppose in the case of some of our manufacturing industries the labor was sent oversees not because it had to be fundamentally cheaper, but because it was easier than dealing with the unions.
I pointed this out last month. Got downvoted, though.
How long do you think Taiwan is going to last as an
autonomous entity, now that it can no longer rely on the
US for military support, because the US is in hock to the
PRC?
True, true ... but this threat only works if the PRC keeps buying our debt. If they stop, they have the problem of getting the outstanding debt redeemed or writing it off, and they are of no use to us going forward (at least in this narrow area).
> How long do you think Taiwan is going to last as an
autonomous entity, now that it can no longer rely on the
US for military support, because the US is in hock to the
PRC?
I spent last month in Taiwan and asked this and similar questions to lots of smart Taiwanese people I know.
The answer is complicated. There's a few points.
1. Chiang Kai-shek retreated to Taiwan in the first place because of the mountainous terrain. You'd take catastrophic losses attacking the place. This is the same reason Switzerland was able to stay neutral during all the various European wars over the last several centuries.
2. Some of the people of Taiwan want to have closer relations with China, open borders, and what not, but they'll almost certainly never be fully annexed into China. Population of China is 1.3 billion. Population of Taiwan ~23 million. So if they came to terms somehow, Taiwan would almost certainly keep their own local government control of the Formosa island, their own currency, and most likely their own separate military force.
3. Due to population differences, in anything resembling a democracy, Taiwan would have very little say over all of combined China's affairs, and combined China would have quite a lot of say over Taiwan's affairs. Thus, it probably won't happen any time soon, but more open borders and friendlier relations is likely.
A sort of side note: I suspect what's got the PLA really upset is the proposed sale of Patriot PAC-3s to the ROC (this is the dedicated ballistic missile killer version, with four smaller missiles in each launcher cell).
You don't have to have a totally effective ABM system to make a first strike difficult to impossible, since your opponent can't choose which missiles get through. I.e. to be absolutely sure you take out a particular target, you have to massively saturate it ... and you can't afford to do that with all the first priority targets.
"A group of senior Chinese military officers" sees US debt as a weapon. Which of course they would, however, whether the civilian leadership shares their view is far less certain. I suspect that China's civilian leadership are far more worried about maintaining sufficient economic growth to avoid civil unrest and uprising, obliterating the US economy is about the last thing they will want to do.
35 comments
[ 2.6 ms ] story [ 109 ms ] threadOf course the Chinese will use US debt as a weapon, just like the US would use it if the situation were reversed.
Don't forget that Russia crashed because of being unable to keep up with the spending patterns of the US, not because of some moral overweight or military pressure. Their economic structure wasn't capable of matching the US and the Afghanistan war (the previous one, the one 9/11 was an outgrowth of) sealed the deal.
The US is in between a rock and a hard place economically when confronted with China, a massive sell-off could destabilize the dollar to the point that traders would favour other currencies (most likely the Euro), and that would accelerate the fall. If you live in a glass house you should not throw with stones.
Or, to paraphrase: When you owe China $1000, you've got a problem. When you owe China $800 billion, China has a problem.
T-Bills are tracked via the book entry system. I.e., the Treasury keeps a registry of who owns what debt. So all we need to do is repudiate all the debt that China currently owns. Then there will be no buyers.
At which point every other holder of U.S. Treasuries will wonder "Am I next?". This will lead to a massive sales of U.S. debt instruments around the world, and would not be good for anyone.
Now UBS will worry we will do the same to them, perhaps in response to Switzerland becoming hostile? Nomura dumps our bonds in anticipation of Japan going all 1942 on us?
While the U.S. short term demographic issues will be bad when the baby boomers retire, the changes are going to be even more extreme in China. When their population ages enough, those accumulated savings will be absolutely critical: http://brontecapital.blogspot.com/2010/02/globalizing-austra... .
I doubt it. Maybe we will be downgraded from AAA to AA, but I doubt we would see more than that. In contrast, China would lose $600-800 billion and anyone else who wants to use debt as a weapon would think twice.
Anyway, it's never going to happen. America's not going to start WWIII over Taiwan, talk about lose-lose.
If the US would do what you say then it would knock the bottom out of the market faster than any Chinese sell of ever would.
The dollar would go in to freefall just about instantly.
http://www.fpri.org/enotes/200709.bracken.financialwarfare.h...
It's not in the best interests of China to cause massive inflation of the US Dollar, but it definitely gives them the ability to put short-term pressure on US politicians.
The effect will be to lower the dollar value which would be good news. (That is how Argentina came out of its Debt Crisis). It will also drive manufacturing back to the United States, where it belonged in the first place.
I always advocated that America should have imported the cheaper labor - like it did for many years - rather than exported the jobs.
Bottom line wish for it, if you live in the States.
It's my semi-vague understanding that "competitive devaluations" don't work well. If by citing Argentina you're implying this is a solution to our debt problem ... well, that would be totally catastrophic in a nation where something like 70% of the wealth is in financial instruments. When countries cancel their debts by inflation, they also tend to "cancel" their system of government (i.e. it gets replaced, as happened in the US with the Continental Congress ("Not worth a Continental")).
Most of the oil producing countries have currencies pegged to the dollar and politically they are bound to stay with it. If you have a low dollar Chinese goods will become more expensive and consumption will go down. America wants a stronger Chinese Yuan and has been pressurizing the Chinese for this - in efect if the Chinese dump dollars America's wish will be granted. (A similar move saw America out of the First Oil Crisis).
I thought the problem with the "Continental" currency was that it got devalued due to the British forging large amounts.
Oil is priced in dollars: if you want to buy oil on the open market/from an OPEC nation, you have to pony up dollars to buy it. That says nothing about how many dollars are required ... e.g. look at what happened starting in the early '70s when Nixon closed the gold window. (I must say it's nice to be on a forum where I can reasonably expect people to know such references.)
As for your second paragraph in toto ... I'm not sure the linkages will work that way.
As for the Continental problem ... yeah, you could be right, I've certainly heard that was a factor, but the bottom line remains the same.
I must say it's nice to be on a forum where I can reasonably expect people to know such references
Best forums on the web on any topic and to top it very civilized:)
However if the US$ started a sharp secular decline unrelated to anything happening in the Gulf (suppose the Fed uses QE to fund the Federal deficit for too long), they could change their pegs and I would imagine that in and of itself wouldn't be viewed negatively.
(Of course in such an event there would be so much financial chaos... well, "Sufficient unto the day is the evil thereof.")
I can't imagine you actually mean slavery here (and I'm not convinced that would be cheaper in any case, morals aside), but I don't know what you could mean.
I don't mean slavery, I believe in a living wage, but I am sure if one does the sums there are a lot of industries that could be rejuvenated if policy could be redirected properly.
One of the problems of the US is its large internal market which resulted in the average US firm not to be geared for exports. This also needs to be addressed. Let me give you an example, I worked in Dubai three years back (large construction industry) on an average quote for machinery that typically goes into large buildings say Fire Pumps the range of prices would be:
US 100K (non-negotiable) US 90-105K (European very negotiable) Asian 85K (negotiable)
Order placed normally with European firm for US 88K
Any factory with not a full order book could marginally cost the products and have a full order book.
I spent last month in Taiwan and asked this and similar questions to lots of smart Taiwanese people I know.
The answer is complicated. There's a few points.
1. Chiang Kai-shek retreated to Taiwan in the first place because of the mountainous terrain. You'd take catastrophic losses attacking the place. This is the same reason Switzerland was able to stay neutral during all the various European wars over the last several centuries.
2. Some of the people of Taiwan want to have closer relations with China, open borders, and what not, but they'll almost certainly never be fully annexed into China. Population of China is 1.3 billion. Population of Taiwan ~23 million. So if they came to terms somehow, Taiwan would almost certainly keep their own local government control of the Formosa island, their own currency, and most likely their own separate military force.
3. Due to population differences, in anything resembling a democracy, Taiwan would have very little say over all of combined China's affairs, and combined China would have quite a lot of say over Taiwan's affairs. Thus, it probably won't happen any time soon, but more open borders and friendlier relations is likely.
You don't have to have a totally effective ABM system to make a first strike difficult to impossible, since your opponent can't choose which missiles get through. I.e. to be absolutely sure you take out a particular target, you have to massively saturate it ... and you can't afford to do that with all the first priority targets.