Earlier today China let Washington and 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 currency.”
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.”
In an instant, China has made it clear that US interest rates depend on China, not on the Federal Reserve.
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. 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.
It is [likewise] China’s decision whether there will be an 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.
[Excerpt of an editorial by Paul Craig Roberts, former Assistant Secretary of the Treasury in the Reagan administration, and Associate Editor of the Wall Street Journal editorial page]