Uncle
Sam, Your Banker
Will See You Now
By Paul Craig Roberts
09 August, 2007
Countercurrents.org
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 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.”
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 hubris?
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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