“Prediction Validated – China and the Dollar” The National Interest

Chinashanghai "Last year, in laying out various scenarios for how the United States might choose to confront Iran’s pursuit of a nuclear weapons program ("Contemplating the Ifs", The National Interest, Summer 2006), W. Patrick Lang and Larry C. Johnson noted that U.S. planners have to consider factors far beyond developments in the Persian Gulf.

One point they raised:

[China] hold[s] a substantial amount of U.S. debt. What happens if they decide to find some other currency to hold instead of the dollar? . . . Although the dollar traditionally has been the currency people seek during a crisis, the growing imbalance with China creates new dynamics that could convince the Chinese that holding dollars no longer made economic sense. Under such a scenario, dumping dollars on the international market would trigger an inflationary spiral in the United States.
The scenario of an inflationary spike triggered by China’s dumping of dollars may strike some as fanciful. The point for U.S. planners and policymakers, though, is to recognize that war brings unintended consequences that go well beyond the tactical realities on the ground where the fighting occurs.

In other words, the United States needs to consider what happens if China uses its financial leverage to affect U.S. freedom of action.

The Daily Telegraph is now reporting:

A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable. . . .
David Powell, an economist at IDEAglobal in New York, pointed the finger at Beijing as the main suspect in the sudden bond flight this summer.
In a client note entitled "Has China started to dump US Treasuries?", he said the sales appear to coincide with early moves by Beijing to launch its new $300bn sovereign wealth fund.
The scheme is part of the government’s plan to diversify it $1,340bn reserves from bonds (mostly in the US) to a broader portfolio of investments and a better yield."  TNI

http://www.nationalinterest.org/Article.aspx?id=15458

This entry was posted in Current Affairs. Bookmark the permalink.

27 Responses to “Prediction Validated – China and the Dollar” The National Interest

  1. meletius says:

    Good call, Col Lang. How many Americans have a clue about this little “problem”? How could it even be explained to a country whose presidential candidates announce on “Leno”?
    As the article also states, China’s shift in dollar/treasury holdings will also cause the dollar to collapse further in value, and necessarily result in a rise in US interest rates as bond prices collapse. How do you think that will help our little mortgage/residential real estate crisis? Houses aren’t selling (and mortgages can’t be had) at current prices/interest rates–imagine the effect of HIGHER interest rates!
    It will also mean that someone else will have to start financing our various trade and budget deficits, as we need $400-600 billion of foreign capital invested each year to keep our national over-consumption ponzi scheme going. Who will that new “investor” be when China decides its US “position” is too extensive?
    Frankly, it’s not reasonable to expect China to hold $1.34 trillion in increasingly underperforming US dollar assets to keep Bush’s War and reckless fiscal policy running indefinitely, is it? So their “motive” may well be simple “economics”, not retaliation.
    Suffice it to say that Bushco will do anything, ANYTHING to persuade China to keep holding on to their crappy, sinking US dollar assets. Lord knows what the “price” will be.
    And now, back to the Petraeus “body count” surge-stistics!

  2. walrus says:

    Col. Lang, to me, this was an obvious and not unexpected development.
    Furthermore, I believe that the size and scope of the secret machinations and manipulations now going on to try and keep the U.S. economy afloat are unprecedented. I do not believe one can even trust the official economic statistics any more.
    One of the possibilities I forsee if we do have a financial meltdown is that America may have to withdraw from Iraq because we may simply be unable to afford to stay.
    I’m not sure that the Saudis would again stump up the money to keep us there.

  3. John Howley says:

    The threat of China driving down the dollar is exaggerated. If the value of dollar were to collapse, China herself would be one of the biggest losers.
    Gradual diversification away from the dollar is another matter and makes perfect sense not only for China but also for other holders of dollar assets including Americans.
    The biggest pools of dollars are in the hands of American banks, institutional investors, hedge funds and insurance companies; in aggregate, these holdings dwarf China’s portfolio.
    Like China, they (we) all have an interest in reducing their (our) exposure to the now risky dollar.
    Check your 401(k).
    The dollar is under pressure because of lousy U.S. policies and not China’s.

  4. mlaw230 says:

    What currency are the Chinese likely to switch to? The euro?

  5. geos says:

    I find this fear-mongering of China really bizarre.
    The health and welfare of the Communist Party in China is directly tied to keeping the economic party going on there going strong. This is entirely built on foreign investment and access to foreign markets.
    The purchase of US Bonds is really a form of graft. We and our friends in Asia invest money (and open our markets) and in return the Chinese government kicks back profits into unsecurable US paper. Remember the Japanese also have a big stake in US debt and an interest in maintaining it’s value.
    The day those tens of millions of rural chinese moving to the cities can’t find jobs will make Tiananmen Square look like a tea party.
    The US and it’s allies present a far greater economic threat to the Chinese government than they do to us.

  6. Clifford Kiracofe says:

    Some years back, I had the opportunity to have lunch with Lyman Kirkpatrick from time to time in Providence, RI at the Hope Club. I recall one conversation in which he drew attention to a past foreign policy issue (and US policy failure) and commented that certain policymakers “didn’t undertand the meaning of power.” He was referring to the economic dimension of power, in this case trade, finance, and investments.
    In the emerging multipolar world we face, attention to economic power is prudent.
    l. The Chinese have been public about their restructuring of various institutions, and creation of new ones, to manage more efficiently and effectively their foreign reserves. This is prudent and pragmatic behavior one would expect of a rising power finding its way into the emerging multipolar world.
    2. The economic dimension of power was, of course, emphasized in Washington’s Farewell Address (1796) for a reason.
    http://www.yale.edu/lawweb/avalon/washing.htm
    and Hamilton, Jefferson, Madison and all the key founders were quite focused on the matter.
    3. A good read on the topic in its relation to military power is in the old edition of Edward Meade Earle, Makers of Modern Strategy (1944), Chapter 6 by Earle “Adam Smith, Alexander Hamilton, Friedrich List: the Economic Foundations of Military Power”. I think it has been deleted in the newer editions as not being “PC” and in line with “globalization” fairy tales.
    4. Economic warfare, as a harder form of economic competition, is a complex subject that deserves more attention. In the sweep of history, currency regimes come and go. Economic HISTORY is a better guide than the endless “models” of economic “theory” of whatever school, IMO. One could look at the currency reforms of Julius Caesar, admittedly a technical subject, and there are other interesting and relevant cases such as the currency consequences of the 4th Crusade (Venice versus Byzantium, 1201-1204).
    5. The United States, according to some analysts, did not recover for a couple of decades from the Johnson era budget impact of the Great Society and Vietnam …stagflation etc through Nixon, Ford, Carter, etc. What will be the impact of the unnecessary Iraq War at a price tag of say $2 trillion while we at the same time run massive budget and current account deficits, and our productive industrial base (including defense industrial base) is hollowed out? Bread and circuses may not suffice.

  7. Sidney O. Smith III says:

    Ludwig Von Mises sayeth:
    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

  8. Jose says:

    Another way to look at the situation is that China may feel threaten by America’s campaigns in the Middle East.
    China needs energy resources more than we do because their economy is growing so fast, so where will they get it?
    China signed several deals with Iran, Sudan and even Iraq before the invasion, so are the Chinese just going to let America campaigns to obtain Petroleum Service Agreements dictates their energy costs?
    I don’t think so.
    Sad but this war was just to secure those PSA’s in my opinion.
    Col, great foresight, just wish the “decider” has as wise a counsel as yourself.

  9. George says:

    I’ve spent the last few years researching and proving (if only to myself) that it is possible to rebuild a typical “Big (cheap) Oil”
    era nation state.
    What I failed to see was the incredible inertia fostered by the associated lifestyle. This inertia spawned most recently the sub-prime tainted commercial paper meltdown.
    Thanks to Pat for remembering that an army travels on its stomach!

  10. When we hear that the US’s above board military spending is $500 billion (or so!) and understand that there are more monies involved, ‘below board,’ AND we also learn this is close to what the rest of the world together spends, besides being an awesome comparison, it’s also a very awesome structural depiction at the macroeconomic scale.
    Reflect on who gets the good end of this bargain.
    Consider this: it may be a possible case that your rival can be funded and seduced by this, and then defunded, and defeated by pulling the plug.
    In effect, the US is a welfare client as far as the source of its military equity goes. The frosting for rivals is: the US gets to do the heavy and bloody lifting in exchange for…paper!

  11. Clifford Kiracofe says:

    Jose,
    You make some interesting points. For historical background, and a for serious analysis, on this issue per Mesopotamia one might consider the following among other scholarly works:
    G. Gareth Jones, “The British Government and the Oil Companies 1912-1924: The Search for an Oil Policy,” The Historical Journal [Cambridge University Press], Vol. 20, No. 3. (Sep., 1977) pp. 647-672.
    and
    “France’s Middle Eastern Ambitions, the Sykes-Picot Negotiations, and the Oil Fields of Mosul, 1915-1918,” The Journal of Modern History, Vol 66, No. 4, (Dec. 1994), pp. 697-725.
    and, in particular,
    Helmut Mejcher, Die Politik und das Ol im Nahen Osten, 1. Der Kampf der Machte und Konzerne vor dem Zweiten Weltkrieg (Stuttgart: Klett-Cotta Verlag, 1980) and the second volume (1990). He has some studies in English on this topic also.

  12. Montag says:

    Economic warfare is quite ancient. During the Revolutionary War the British actually ran a sophisticated counterfeiting operation (this was legal under the rules of war because it was an insurrection). Ben Franklin devised the first anti-counterfeiting measures by printing leaves on the Continental currency and embedding bits of mica in the paper.
    During the Civil War a Philadelphia printer sold Confederate currency with “facsimile” printed on the border. But Union soldiers would trim off the caveat with scissors and pass the bogus bills down South. The Confederacy offered a reward of $10,000 for the printer’s capture! While the Federal government didn’t help this operation, they also didn’t do anything to stop it.
    During WWII the Nazis came up with a counterfeiting operation which printed foreign currencies. They had to keep this secret from their own foreign office because it violated the Geneva Convention. The only way the British could purge their money supply of the fiendishly clever 5 Pound Notes printed in Germany was by circulating an entirely new issue after the war!

  13. jo6pac says:

    Yes everyone is right they have been moving away from $ for awhile. They would still like the 08 Games to happen without problems but I’m sure the King and Friends will push as hard as they can up to that date. If China is so inclined after the games bye,bye US.
    jo6pac

  14. Got A Watch says:

    If there is concern about China, then be worried about putative “allies” in the Middle East and elsewhere. For example, I read just today that Saudi Arabia, Kuwait and the UAE have a bigger pile of US $ than China. Add the other miscellaneous Gulf oil states, and you have a huge mountain of $ that does not want to be in $ anymore.
    For America, the credit card bill has come due. No matter what the Fed and government do now, they cannot restore confidence or solve the pressing current economic problems, even if they knew how.
    A time of decline and retrenchment is at hand, after which much re-building will be required, if the national will and budgets still exist for such.

  15. ISL says:

    To note the obvious, if the US ran a current account surplus (total of goods and services and thus a more meaningful number than the trade deficit), what China and others did with the dollar easily could be weathered through raising taxes, or printing money (monetarizing debt if you will).
    However, our historically unprecendented deficit in a debt ridden society means that confidence in the dollar is critical or consumption must decline precipitously – either by shortages or by dollar prices rising such that people and businesses stop purchasing foreign (and domestic) goods. This is hyperinflation. Many developing countries have suffered it, and it is extremely damaging to all aspects of society. Note, under conditions of high inflation, moving a factory to the US from China is a bad business decision – so the “domestic production of TVs, DVDs, computers, does not just move to Argentina” to balance the trade – rather no one gets to buy those things. Of course computers are critical for a competitive economy, so businesses that use computers become outdated and uncompetitive. Meanwhile teleservicing from India will still be cheaper.
    The crux is that if China dumps dollars, then there will be no confidence in the dollar. Jose is right on, China needs to prevent its strategic access to oil from being controlled by the US (and Russia), and already has announced its willingness to use the nuclear dollar option.
    Meanwhile, just the possibility of China (and then others in a mad rush) dumping dollars, means the wise business decision is to decrease the dollar percentage in ones portfolio. This is what is happening (and has been happening for a few years on the part of the ME sheikdoms).
    To summarize, when something cannot continue forever, it does not. Running an account deficit of 7% GNP is one such thing.

  16. bh says:

    Got A Watch makes a great point. The problem is not China. The problem is that the US has borrowed from everyone, including its own homeowners and taxpayers, to sustain an unsustainable economy.
    The recent “globalization” of the corporate financial and manufacturing structures has been largely financed by US willingness to export jobs and import consumer goods, and to borrow money to balance the outflow of dollars. Economic history has shown, as Col. Lang and other commenters point out, that there is always a day of reckoning. The crisis, when it comes, whether slow or fast, will represent a massive failure of insight and will on the part of all Americans, leaders and average citizens.

  17. China hand says:

    From above:
    “The health and welfare of the Communist Party in China is directly tied to keeping the economic party going on there going strong. This is entirely built on foreign investment and access to foreign markets.”
    With all due respect to Mr Howley, this simply isn’t true. If the greenback falters, the Chinese production base will still find plenty of places to trade with; already, they have rapidly-improving (and heavily subsidized) relations with much of Africa, South America, and the Middle East. While the urban cultures in Mainland China do depend on the greenback for the current growth, the peasant cultures are still vibrant and alive. Rural Chinese are still the vast majority and see automobiles and cel-phones as a convenient luxury. Should doodads ever become scarce there may be a bit of sentimental mourning but not much else. Dollars are just irrelevant to those people.
    In times of economic hardship the CCP has demonstrated a penchant for massive, sponsored social movements, and there has never been a renunciation. China’s population programs have done a great job of alleviating the pressure that other countries (i.e. – Western Europe, Africa, South America, the U.S.) are just beginning to deal with; none of that would change, and in the event of another great depression all of it will give China a solid base for maintaining its current standard of living.
    In the Western and Southern provinces, China is not building schools and factories. Their economic developmentt policies are emphasizing not industrial development and urban technology, but decentralized institutions, environmental concerns, and a mobile information economy.
    In other words: China is already trying very diligently, on multiple fronts to get people out of cities and factories and back to the farm. In that light their poltical reforms these last 15 years make perfect sense — much moreso than as some sort of imitation of Western-style democracy.
    Remember, also, that the Chinese sufffered great humiliation under Western Colonialist rule. They do not expect a genteel welcome into the Clan of Superpowers. Not only do they have a plan B, but also C, D, and E, each one of which expects conflict of some sort.
    In answer to mlaw: Yes. The Chinese are *very* fond of the Euro. But my suspicion is that they aren’t thinking that small. Rumours over here are that they were in talks with Iraq to set up an alternative oil bourse, and have been holding similar talks with the Iranians.

  18. Jose says:

    Clifford Kiracofe. I will try to read what you have suggested.
    Thank you for the lead.

  19. mlaw230 says:

    China Hand: Thanks for that informative post. Has the Iranian Oil bourse been established as yet? I recall great skepticism last year as to Iran’s ability to pull that off on their own, but with China and perhaps India and/or Venezuala on board it seems more plausible.
    Could a new bourse go undetected for a while?

  20. mike says:

    The Suez fiasco of 1956 will soon be passing from living memory into the pages of the history books. The British and French – supposedly world powers 3 and 4 (newspapers in those days used to talk regularly of the “Big Four”) mounted an aerial bombardment of Egypt followed by a land invasion, ostensibly to preserve the safety of the Suez Canal, threatened by a war between Israel and Egypt. In reality, the British and French had colluded with the Israelis whom they actively encouraged to invade the Sinai, so as to give a justification for the two European powers to intervene and rescue the canal, so vital to Europe’s oil supplies. The British Prime Minister, Anthony Eden, was obsessed with President Nasser, whom he likenreed to the Fascist dictators of the 1930s. His great moment of glory had been when he resigned from the cabinet of the Chamberlain government after the Munich agreement. Eden insisted that allowing Nasser to get away with nationalising the Suez Canal would be akin to the appeasement of Hitler and Mussolini, and that the invasion of Egypt and hopefully the overthrow of the “tinpot dictator” in Cairo would be an act of preservation and promotion of democracy in the Middle East.
    The invasion went ahead. Militarily, it was a success – what else could it have been? The ill armed forces of a third world country facing the combined forces of the major European powers, the RAF abd Armee de l’Aire, a combined fleet of five or more carriers and escorts and landing craft, the battle hardened troops of the French so recently expelled from Indo China and now deeply entrenched in war in Algeria, the British Paras and Royal Marines crack guards regiments – it was effectively shock and awe, 1956 style. Then, much to Eden’s surprise and dismay, President Eisenhower aligned the USA with the Soviet Union in the UN and called for the Anglo-French forces to withdraw. Kruschev was asking the rhetorical question of how it would be if Paris and London were bombed fron the air as Cairo had been 9At the same tinme as ordering troops into Budapest to suppress the uprising there). But it was the weakness of the British economy that really forced them and the French to halt their troops’ advance down the Canal and to acquiesce to the united Russo-American insistence that they withdraw. Year by year, Britain was running a massive balance of payments deficit and constantly seemed to be battling inflation. President Eisenhower withdrew all American support from the british economy. The cost of the Suez adventure was draining the British treasury. There was a flight of funds out of the country, and Britain and France ignominiously capitulated. Though undefeated militarily – the overwhelming might of the combined powers’ forces had been slicing through Egypt effortlessly – Britain and France were forced to acknowledge that their rash adventurism had brought them to diplomatic defeat. It was the weakness of the pound sterling and the gross imbalance of the British economy that turned military triumph int abject defeat. Eden had a nervous breakdown and resigned as PM, and British and French pretensions to be great powers were gone. Within a few years, the French and British colonial empires were no more.
    I would not suggest that the Iraq (and Iran?) fiasco marks the end of the US hegemony as Suez marked the end of Anglo-French power; there is no sign of Bush suffering such a breakdown as Eden had – yet. But it does seem that the US is as vulnerable to a military defeat as the UK and France were.

  21. John Howley says:

    Dear Friends:
    The best and most recent case of economic warfare is often (always?) overlooked for some reason. This was the successful campaign waged by the U.S. against the USSR in the 1980s (led by Bill Casey at CIA).
    The main components were:
    (1) Star Wars charade to drive up unproductive Soviet military spending.
    (2) Bleed ’em dry in Afghanistan.
    (3) Sabotage gas pipeline to West Europe.
    (4) Last but not least, have the Saudis drive down the price of oil in 1985.
    Gorbachev to his credit tried to change course on each of these but could not recover from the oil price drop.
    Of course, Putin and his siloviki friends have forgotten all about this, right?
    (P.S. “china hand” …it wasn’t me commenting on “health and welfare of the CCP.”)

  22. Clifford Kiracofe says:

    Per China and currency systems or “monetary systems,” the thread got me to dig out my copy of following for some background and interesting reading:
    Eduard Kann, The Currencies of China. An Investigation of Gold and Silver Transactions Affecting China (Shanghai: Kelly & Walsh, Ltd., MCMXXVI). [forward is by Julean Arnold, American Commercial Attache, Peking).
    As China Hand points out, these folks are rather sensitive about past exploitation. On this, the following might be helpful as historical background:
    Roberta Allbert Dayer, Bankers and Dipomats in China 1917-1925 (London: Frank Cass, 1981).

  23. Leila says:

    My inner housewife perks up her ears at this economic talk. The salient phrase:
    “spend less and save more.”
    Folks, this is boring, old-fashioned, out-of-date and maybe tedious, but spending less and saving more are key to our survival. Most of our current problems with the environment, energy, foreign policy and the economy would be solved (or greatly lessened) if everybody would just spend (and consume) less and save more. Oh yes, and our health problems would improve too (overeating is behind many, many preventable diseases in this country)
    Being frugal is not just a personal good choice like always writing thank-you notes. Reducing your consumption is the one big thing you can do starting this minute that will reduce your energy use, your contribution to the national debt and trade deficit, your waistline, and so forth.
    If you didn’t have too much student loans, credit card debt, car debt and mortgage, if you didn’t eat too much, drive too much, and try to look like you are upper class when you are really middle class, then your bottom line (fiscal and corporeal) would look much, much better. And if your personal prudence were multiplied by the 200 million or so grown-ups in this country, why the damned deficits would dissolve.
    Oh yes, and do you really have to drive your car everywhere? If you do, then do you really need to live way the hell out in Exurbia so you have to drive everywhere? What are you going to do to get a decent public transit system back in this country? We had one circa 1940. We could have one again.

  24. charly says:

    Mike, you see an even beter debtdefeat if you look at how Egypte was colonized by the West.
    John Howley, this is not about economic warfare. Just ordinary business

  25. China hand says:

    Sorry about the confusion, Mr Howley. That obviously should’ve been directed at geos. And I do fully agree with you about economic warfare, although I’m not sure your ’80’s example to my mind qualifies. I perceive the fall of the Soviet Union as less related to U.S. policy than to an inevitable implosion from internal pressures — I credit the invention of computers and telecommunications hardware much more than I do ’80’s era CIA policies.
    @charly : I respectfully disagree; “Ordinary Business” is what takes place between neighbors who largely share an interest in the success or failure of their local community and are competing with each other within an agreed upon, ethical framework. Economic Warfare is an entirely different thing altogether, in much the same way a boxing match or a football game is different from a declaration of war.
    I’d suggest a better example — and one quite relevant to this discussion — would be the years following the Opium Wars, where China was forced to eliminate state-sponsored anti-drug policies that were directly analagous to the U.S.’s current “War on Drugs”. Britain wanted porcelain and tea, but couldn’t find any products that interested the Chinese people enough to balance the trade; meanwhile, China was amassing a huge silver reserve while quite literally draining Britain’s coffers. Opium was the solution, and in addition helped to destabilize Chinese government institutions through corruption and graft. A weakened central Chinese government in turn allowed Overseas Chinese even greater freedom to aid European businesses in the South Pacific, which in turn increased the graft and corruption in Mainland China. It was a debilitating cycle from which the Imperial Court never recovered.
    It’s a formula that has since been followed many times over, and is relevant to the current situation insofar as the balance of trade is today flowing in the opposite direction: from the U.S. to China. The U.S. is going to have just as hard a time squaring this circle as the Imperial Court once did, and – I would argue – for similar reasons (nothing nefarious; just human praxis). The difference is that this is the first century in a long line of centuries that Western governments have faced a serious non-European competitor.
    mlaw: I don’t really see any point to an undisclosed bourse. When considering such a significant institution, I think the key worry would be when interested parties might be able to back up their intent with both economic and military power.
    Militarily that is still a few years off for China (I have heard numbers from Jane’s Defense people of something like 10 years, give or take a few?), but not so far off that they aren’t already taking action today. Economically, both India and China have already gone a long way towards laying a solid groundwork.
    Let me also say I don’t consider this a terrible threat to the U.S. per se; but if our current policies continue to be interpreted through what are essentially colonialist- and cold war frameworks then I am cetain there will be grave, pervasive tribulations within my own lifetime.
    In short, I fully agree with Col. Lang: this “flat earth” thing of Friedman’s is worse than a bunch of hot air.

  26. China hand says:

    Sorry about the confusion, Mr Howley. That obviously should’ve been directed at geos. And I do fully agree with you about economic warfare, although I’m not sure your ’80’s example to my mind qualifies. I perceive the fall of the Soviet Union as less related to U.S. policy than to an inevitable implosion from internal pressures — I credit the invention of computers and telecommunications hardware much more than I do ’80’s era CIA policies.
    @charly : I respectfully disagree; “Ordinary Business” is what takes place between neighbors who largely share an interest in the success or failure of their local community and are competing with each other within an agreed upon, ethical framework. Economic Warfare is an entirely different thing altogether, in much the same way a boxing match or a football game is different from a declaration of war.
    I’d suggest a better example — and one quite relevant to this discussion — would be the years following the Opium Wars, where China was forced to eliminate state-sponsored anti-drug policies that were directly analagous to the U.S.’s current “War on Drugs”. Britain wanted porcelain and tea, but couldn’t find any products that interested the Chinese people enough to balance the trade; meanwhile, China was amassing a huge silver reserve while quite literally draining Britain’s coffers. Opium was the solution, and in addition helped to destabilize Chinese government institutions through corruption and graft. A weakened central Chinese government in turn allowed Overseas Chinese even greater freedom to aid European businesses in the South Pacific, which in turn increased the graft and corruption in Mainland China. It was a debilitating cycle from which the Imperial Court never recovered.
    It’s a formula that has since been followed many times over, and is relevant to the current situation insofar as the balance of trade is today flowing in the opposite direction: from the U.S. to China. The U.S. is going to have just as hard a time squaring this circle as the Imperial Court once did, and – I would argue – for similar reasons (nothing nefarious; just human praxis). The difference is that this is the first century in a long line of centuries that Western governments have faced a serious non-European competitor.
    mlaw: I don’t really see any point to an undisclosed bourse. When considering such a significant institution, I think the key worry would be when interested parties might be able to back up their intent with both economic and military power.
    Militarily that is still a few years off for China (I have heard numbers from Jane’s Defense people of something like 10 years, give or take a few?), but not so far off that they aren’t already taking action today. Economically, both India and China have already gone a long way towards laying a solid groundwork.
    Let me also say I don’t consider this a terrible threat to the U.S. per se; but if our current policies continue to be interpreted through what are essentially colonialist- and cold war frameworks then I am cetain there will be grave, pervasive tribulations within my own lifetime.
    In short, I fully agree with Col. Lang: this “flat earth” thing of Friedman’s is worse than a bunch of hot air.

  27. The 1956 Suez precedent, while real, is actually less ominous than another, the 1929 Wiemar Republic precedent
    To make a long story short, in the late 1920’s, the Wiemar Republic had been propped up by loans from the United States. After the 1929 stock market crash, the United States then became unable to continue propping up Wiemar. The rest, as they say, is history….
    Quite obviously, this 1929 cessation of support resulted, not from any policy choice by the United States but simply because the 1929 economic panic overwhelmed it.
    And this could happen to China too. One reason why the recent reports of lead paint in children’s toys is so disturbing is that it is one of many indicators that the Chinese economy is more form than substance. Other indicators: the rampant pollution, the unrest in the countryside, the wage pressures ( yes, this is happening ), the unsound banking structure, the corruption.
    The difference between the 1956 scenario and the 1929 scenario is that the 1956 scenario, for all the problems that it would indeed pose, nevertheless would be controllable.

Comments are closed.