Wednesday, August 08, 2007

China's Other Nuclear Option

From the Standard: China threatens 'nuclear option' of dollar sales.

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

I think this is less of a "nuclear option" than a mention of the obvious fact that China has a firm grip on one of our most vulnerable organs. Unlike a real "nuclear option" this one is one that can be rather precisely calibrated. Like a real "nuclear option" the money bomb is double edged - one of the first things to collapse would be US purchases from China.

More important than the threat is the fact that China cannot and will not continue to stockpile dollars forever - at some point they will get tired of lending us ever more money.