In case you’ve been oblivious…

Paul Craig Roberts has pointed out that “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.” Roberts argues that only foreigners can finance United States debt; should they cease to do so, or decide to sell off the securities they already hold, the value of the U.S. dollar would drop dramatically, making it impossible for the United States to continue its imperialist (and other) adventures. This would, Roberts argues, also be ruinous for the U.S. economy, as inflation would skyrocket.

At this writing, U.S. national debt stands at nearly $9 trillion. China holds approximately 10% of this debt. Since the United States operates at a deficit, thanks to Republicans who have controlled the US Government since they inherited a surplus from Bill Clinton, the country continuously needs to sell more debt. Should China choose to sell off its holdings, driving down the value of existing debt, the U.S. would have to drastically increase the return, otherwise known as interest, it offers on the new debt it continuously incurs in order to lure buyers; hence Roberts’ claim that “US interest rates depend on China, not on the Federal Reserve.”

China, however, is somewhat trapped. It would lose a considerable amount of money if it suddenly dumped U.S. debt. But, “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,'” according to “two senior spokesmen for the Chinese government [who] 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.'”

If the Yuan appreciates significantly, China may lose money on its dollar-denominated assets anyway.

Japan, which also holds a considerable amount of U.S. debt, rejected an Iranian request that it should pay for oil using non-U.S. currencies. While the Financial Times attributes this decision to U.S. pressure, a drop in the value of the U.S. Dollar would also reduce the value of Japan’s own holdings. But Iran isn’t the only one. According to, “The dollar, down 9.5 percent against the euro this year, may face more pressure in 2007 because Venezuela and oil producers from the United Arab Emirates to Indonesia plan to funnel more money into the single European currency.”

If the sinking dollar has already become a hot potato, it retains value, according to Roberts, only because:

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.

Someone once pointed out to me that it is never too early to sell off a losing investment; the only question here is whether Japan and China perceive that it is too late.

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