Uncle Sam, Your Banker Will See You Now
Paul Craig Roberts
08/08/07 "ICH" --- - Early this morning China let the idiots
in Washington, and on Wall Street, know that it has them by
the short hairs. Two senior spokesmen for the Chinese
government observed that China’s considerable holdings of US
dollars and Treasury bonds “contributes a great deal to
maintaining the position of the dollar as a reserve
Should the US proceed with sanctions intended to cause the
Chinese currency to appreciate, “the Chinese central bank
will be forced to sell dollars, which might lead to a mass
depreciation of the dollar.”
If Western financial markets are sufficiently intelligent to
comprehend the message, US interest rates will rise
regardless of any further action by China. At this point,
China does not need to sell a single bond. In an instant,
China has made it clear that US interest rates depend on
China, not on the Federal Reserve.
The precarious position of the US dollar as reserve currency
has been thoroughly ignored and denied. The delusion that
the US is “the world’s sole superpower,” whose currency is
desirable regardless of its excess supply, reflects American
hubris, not reality. This hubris is so extreme that only 6
weeks ago McKinsey Global Institute published a study that
concluded that even a doubling of the US current account
deficit to $1.6 trillion would pose no problem.
Strategic thinkers, if any remain who have not been purged
by neocons, will quickly conclude that China’s power over
the value of the dollar and US interest rates also gives
China power over US foreign policy. The US was able to
attack Afghanistan and Iraq only because China provided the
largest part of the financing for Bush’s wars.
If China ceased to buy US Treasuries, Bush’s wars would end.
The savings rate of US consumers is essentially zero, and
several million are afflicted with mortgages that they
cannot afford. With Bush’s budget in deficit and with no
room in the US consumer’s budget for a tax increase, Bush’s
wars can only be financed by foreigners.
No country on earth, except for Israel, supports the Bush
regimes’ desire to attack Iran. It is China’s decision
whether it calls in the US ambassador, and delivers the
message that there will be no attack on Iran or further war
unless the US is prepared to buy back $900 billion in US
Treasury bonds and other dollar assets.
The US, of course, has no foreign reserves with which to
make the purchase. The impact of such a large sale on US
interest rates would wreck the US economy and effectively
end Bush’s war-making capability. Moreover, other
governments would likely follow the Chinese lead, as the
main support for the US dollar has been China’s willingness
to accumulate them. If the largest holder dumped the dollar,
other countries would dump dollars, too.
The value and purchasing power of the US dollar would fall.
When hard-pressed Americans went to Wal-Mart to make their
purchases, the new prices would make them think they had
wandered into Nieman Marcus. Americans would not be able to
maintain their current living standard.
Simultaneously, Americans would be hit either with tax
increases in order to close a budget deficit that foreigners
will no longer finance or with large cuts in income security
programs. The only other source of budgetary finance would
be for the government to print money to pay its bills. In
this event, Americans would experience inflation in addition
to higher prices from dollar devaluation.
This is a grim outlook. We got in this position because our
leaders are ignorant fools. So are our economists, many of
whom are paid shills for some interest group. So are our
corporate leaders whose greed gave China power over the US
by offshoring the US production of goods and services to
China. It was the corporate fat cats who turned US Gross
Domestic Product into Chinese imports, and it was the “free
trade, free market economists” who egged it on.
How did a people as stupid as Americans get so full of
Paul Craig Roberts was Assistant Secretary of the
Treasury in the Reagan administration. He was Associate
Editor of the Wall Street Journal editorial page and
Contributing Editor of National Review. He is coauthor of
The Tyranny of Good Intentions.
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