-Caveat Lector-
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From: [EMAIL PROTECTED]
Date: August 10, 2007 8:41:29 PM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Fwd: China's 'Nuclear Option' Is Real
Get a sneak peek of the all-new AOL.com.
From: "Jim S." <[EMAIL PROTECTED]>
Date: August 10, 2007 5:10:32 PM PDT
To: [EMAIL PROTECTED]
Subject: China's 'Nuclear Option' Is Real
Reply-To: [EMAIL PROTECTED]
------------------------
"America is a nation founded on the principle that all human life
is sacred...
Destroying human life in the hopes of saving human life is not
ethical."-- G.W.
Bush on the occasion of vetoing Congressional bill on stem cell
research. June
20, 2007
http://www.informationclearinghouse.info/article18154.htm
*China's 'Nuclear Option' Is Real*
By Paul Craig Roberts
08/11/07
"ICH' -- Twenty-four hours after I reported Chinas announcement
that China, not
the Federal Reserve, controls U.S. interest rates by its decision
to purchase,
hold, or dump U.S. Treasury bonds, the news of the announcement
appeared in
sanitized and unthreatening form in a few U.S. news sources.
The Washington Post found an economics professor at the University
of Wisconsin
to provide reassurances that it was "not really a credible threat"
that China
would intervene in currency or bond markets in any way that could
hurt the
dollars value or raise U.S. interest rates, because China would
hurt its own
pocketbook by such actions.
U.S. Treasury Secretary Henry Paulson, just back from Beijing,
where he gave
China orders to raise the value of the Chinese yuan "without
delay," dismissed
the Chinese announcement as "frankly absurd."
Both the professor and the Treasury Secretary are greatly mistaken.
First, understand that the announcement was not made by a minister
or vice
minister of the government. The Chinese government is inclined to
have important
announcements come from research organizations that work closely
with the
government. This announcement came from two such organizations. A
high official
of the Development Research Center, an organization with cabinet
rank, let it be
known that U.S. financial stability was too dependent on Chinas
financing of
U.S. red ink for the U.S. to be giving China orders. An official
at the Chinese
Academy of Social Sciences pointed out that the reserve currency
status of the
U.S. dollar was dependent on China's good will as America's lender.
What the two officials said is completely true. It is something
that some of us
have known for a long time. What is different is that China
publicly called
attention to Washingtons dependence on China's good will. By
doing so, China
signaled that it was not going to be bullied or pushed around.
The Chinese made no threats. To the contrary, one of the officials
said, "China
doesn't want any undesirable phenomenon in the global financial
order." The
Chinese message is different. The message is that Washington does
not have
hegemony over Chinese policy and if matters go from push to shove,
Washington can
expect financial turmoil.
Paulson can talk tough, but the Treasury has no foreign currencies
with which to
redeem its debt. The way the Treasury pays off the bonds that come
due is by
selling new bonds, a hard sell in a falling market deserted by the
largest buyer.
Paulson found solace in his observation that the large Chinese
holdings of U.S.
Treasuries comprise only "one days trading volume in
Treasuries." This is a
meaningless comparison. If the supply suddenly doubled, does
Paulson think the
price of Treasuries would not fall and the interest rate not rise?
If Paulson
believes that U.S. interest rates are independent of Chinas
purchases and
holdings of Treasuries, Bush had better quickly find himself a new
Treasury
Secretary.
Now lets examine the University of Wisconsin economists
opinion that China
cannot exercise its power because it would result in losses on its
dollar
holdings. It is true that if China were to bring any significant
percentage of
its holdings to market, or even cease to purchase new Treasury
issues, the prices
of bonds would decline, and China's remaining holdings would be
worth less. The
question, however, is whether this is of any consequence to China,
and, if it is,
whether this cost is greater or lesser than avoiding the cost that
Washington is
seeking to impose on China.
American economists make a mistake in their reasoning when they
assume that China
needs large reserves of foreign exchange. China does not need
foreign exchange
reserves for the usual reasons of supporting its currencys value
and paying its
trade bills. China does not allow its currency to be traded in
currency markets.
Indeed, there is not enough yuan available to trade. Speculators,
betting on the
eventual rise of the yuans value, are trying to capture future
gains by trading
"virtual yuan." The other reason is that China does not have
foreign trade
deficits, and does not need reserves in other currencies with which
to pay its
bills. Indeed, if China had creditors, the creditors would be
pleased to be paid
in yuan as the currency is thought to be undervalued.
Despite China's support of the Treasury bond market, China's large
holdings of
dollar-denominated financial instruments have been depreciating for
some time as
the dollar declines against other traded currencies, because people
and central
banks in other countries are either reducing their dollar holdings
or ceasing to
add to them. China's dollar holdings reflect the creditor status
China acquired
when U.S. corporations offshored their production to China.
Reportedly, 70% of
the goods on Wal-Mart's shelves are made in China. China has
gained technology
and business know-how from the U.S. firms that have moved their
plants to China.
China has large coastal cities, choked with economic activity and
traffic, that
make America's large cities look like country towns. China has
raised about 300
million of its population into higher living standards and is now
focusing on
developing a massive internal market some 4 to 5 times more
populous than Americas.
The notion that China cannot exercise its power without losing its
U.S. markets
is wrong. American consumers are as dependent on imports of
manufactured goods
from China as they are on imported oil. In addition, the profits
of U.S. brand
name companies are dependent on the sale to Americans of the
products that they
make in China. The U.S. cannot, in retaliation, block the import
of goods and
services from China without delivering a knock-out punch to U.S.
companies and
U.S. consumers. China has many markets and can afford to lose the
U.S. market
easier than the U.S. can afford to lose the American brand names on
Wal-Marts
shelves that are made in China. Indeed, the U.S. is even dependent
on China for
advanced technology products. If truth be known, so much U.S.
production has been
moved to China that many items on which consumers depend are no
longer produced
in America.
Now let's consider the cost to China of dumping dollars or
Treasuries compared to
the cost that the U.S. is trying to impose on China. If the latter
is higher
than the former, it pays China to exercise the "nuclear option" and
dump the dollar.
The U.S. wants China to revalue the yuan, that is, to make the
dollar value of
the yuan higher. Instead of a dollar being worth 8 yuan, for
example, Washington
wants the dollar to be worth only 5.5 yuan. Washington thinks that
this would
cause U.S. exports to China to increase, as they would be cheaper
for the
Chinese, and for Chinese exports to the U.S. to decline, as they
would be more
expensive. This would end, Washington thinks, the large trade
deficit that the
U.S. has with China.
This way of thinking dates from pre-offshoring days. In former
times, domestic
and foreign-owned companies would compete for one anothers
markets, and a
country with a lower valued currency might gain an advantage.
Today, however,
about half of the so-called U.S. imports from China are the
offshored production
of U.S. companies for their American markets. The U.S. companies
produce in
China, not because of the exchange rate, but because labor,
regulatory, and
harassment costs are so much lower in China. Moreover, many U.S.
firms have
simply moved to China, and the cost of abandoning their new Chinese
facilities
and moving production back to the U.S. would be very high.
When all these costs are considered, it is unclear how much China
would have to
revalue its currency in order to cancel its cost advantages and
cause U.S. firms
to move enough of their production back to America to close the
trade gap.
To understand the shortcomings of the statements by the Wisconsin
professor and
Treasury Secretary Paulson, consider that if China were to increase
the value of
the yuan by 30 percent, the value of China's dollar holdings would
decline by 30
percent. It would have the same effect on China's pocketbook as
dumping dollars
and Treasuries in the markets.
Consider also, that as revaluation causes the yuan to move up in
relation to the
dollar (the reserve currency), it also causes the yuan to move up
against every
other traded currency. Thus, the Chinese cannot revalue as Paulson
has ordered
without making Chinese goods more expensive not merely to Americans
but everywhere.
Compare this result with China dumping dollars. With the yuan
pegged to the
dollar, China can dump dollars without altering the exchange rate
between the
yuan and the dollar. As the dollar falls, the yuan falls with it.
Goods and
services produced in China do not become more expensive to
Americans, and they
become cheaper elsewhere. By dumping dollars, China expands its
entry into other
markets and accumulates more foreign currencies from trade surpluses.
Now consider the non-financial costs to China's self-image and
rising prestige of
permitting the U.S. government to set the value of its currency.
America's
problems are of its own making, not China's. A rising power such
as China is
likely to prove a reluctant scapegoat for America's decades of
abuse of its
reserve currency status.
Economists and government officials believe that a rise in consumer
prices by 30
percent is good if it results from yuan revaluation, but that it
would be
terrible, even beyond the pale, if the same 30 percent rise in
consumer prices
resulted from a tariff put on goods made in China. The hard
pressed American
consumer would be hit equally hard either way. It is paradoxical
that Washington
is putting pressure on China to raise U.S. consumer prices, while
blaming China
for harming Americans. As is usually the case, the harm we suffer
is inflicted
by Washington.
~~~
Paul Craig Roberts was Assistant Secretary of the Treasury in the
Reagan
administration. He was Associate Editor of the Wall Street Journal
editorial
page and Contributing Editor of "National Review." He is co-author
of "The
Tyranny of Good Intentions."
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