There’s an old saying that goes something like this:
“When you owe the bank $1,000,000, you have a major problem.
When you owe the bank $100,000,000, the bank has a major problem.”
Those of you familiar with the economic policy of the United States over the last few decades will recognize that in the saying listed above, the US is the ‘debtor’ and the rest of the world’s central banks are the ‘banks.’ Apparently, when the bank has several trillion dollars worth of everyone’s reserves, it’s not a wise idea to threaten said creditor with trade sanctions.
The common wisdom has been that China, who holds somewhere in the neighborhood of one trillion (yes, trillion) dollars worth of US bonds, is so dependent on the US market that they would be forced to buy and hold US dollars just to keep the consumer market in the States afloat. In order to keep the value of all their dollars up, China would be forced to not only keep buying dollars, but even buy them at a faster clip, while the US Treasury continued to more-or-less print dollars at will, thanks to the dollar/petrodollar’s unique role as the world’s reserve currency.
That may have been the case for a while, but perhaps not anymore.
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.
There’s been talk of the US wanting China to remove the dollar peg from the yuan for several years now… the idea being that our trade deficit with China would somehow mysteriously correct itself if the yuan was allowed to rise to it’s market value. As mentioned above, the rhetoric has been turned up in recent months, with some legislators in DC talking about trade sanctions and the like if China fails to heed their wishes.
The Telegraph article I quoted from shows that our friends in Beijing know just how much clout they can exert over US financial policy, and it sounds like they have decided that they are willing to absorb the damage that would result from their dumping of US bonds, and that they’d come out better than we would.
The US dollar continues to maintain it’s strength due to other countries willingness to continue buying our debt, with China being one of if not the major buyer. If this game of brinksmanship continues to get more and more vitriolic, it could get really, really ugly.