11/17/09 Stockholm, Sweden – It’s become increasingly common to hear the US discussed as if it’s at the economic mercy of China. Sure, it’s true that China is the world’s biggest foreign holder of US debt with nearly $800 billion in Treasuries. That said, Ambrose Evans-Pritchard points out a few tools, if drastic, that the US has at its disposal to defend its economic might.
Here’s his description of American leverage…
“It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.
“If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.”
Evans-Pritchard paints the picture of a fairly dark and disturbing economic environment. Things would have to get pretty bad for these options to be employed. Still, there’s something refreshing about seeing the remnants of US economic power spelled out in no uncertain terms (…by a Brit no less).
The whole article is an interesting read, and covers how China’s $600 billion stimulus has been spent, how credit has exploded, and other issues in the Daily Telegraph’s coverage of how China is now the biggest risk to the world economy.
Rocky Vega
Rocky Vega is publisher of The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.
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The chinese caféholder has but one american drinker. The drinker regularily pays a good deal of the bill, but recently, he’s running a bigger and bigger tab. In the meanwhile, the chinese barholder is constanly re-decorating. However, our american drinker isn’t so thirsty anymore. Thirsty enough to keep adding to the bill, but lately, more and more barpersonnel are being made to redecorate, instead of serving drinks. There are two ways out of this; the chinese barholder can look out for new drinkers, because the american drinker has already started to cut back. The american drinker can renege on his tab, and search another bar. This has “conflict” written all over it.
Trade protectionism.
That was the main motive for two world wars…
China and everybody else would retaliate. World trade would collapse with the direst of consequences.
Also, that would put an end to all the outsourcing fortunes created in the last two decades.
Those lobbies are in control. They rather risk default than loose their “investment”.