Last week, I wrote here about a report in the UK Telegraph. In the report, two Chinese Party members threatened the “nuclear option” with our currency. This move would effectively dump billions of US currency and bonds on the market, devaluing our currency beyond the historically low levels that it currently resides.
China may be sending a shot across our bow, or may be blowing smoke up our asses. The simple fact that another country can have such power over our finances and potentially use that power as a political tool is a direct threat to the efficacy of our nation. My position is, if they can, we need to assume that they will. The solution; work tirelessly to correct the problem (buy back the debt).
Since that piece, we have seen the Dow lose around 8% of it’s value due to a scare in the sub-prime mortgage market. Additionally, the dollar dropped further today due to the lowering of interest rates by the Federal Reserve. The market needed more liquidity, but as long as lenders are crapping themselves, we could drop the rates to zero and see little result. Japan’s financial crunch of several years ago is a great example of this effect. They had free money (0% interest from bank to bank) available for years, but it took several years for the lenders to come around and inject more liquidity into the economy.
I don’t think anyone is arguing that these events (China and the sub-prime market) are directly linked, but both issues are related to our fiscal policy decisions over the course of both this administration and, to a certain extent, the former. Our insistence on dismantling our ability to provide for ourselves through the outsourcing of our industrial infrastructure is the problem. By doing so, we set our nation up to be held hostage by those who may or may not have OUR best interests in mind.
By mortgaging our future through budget and trade deficits we give our economic competitors additional leverage against our financial independence. This leverage may not lead to the “nuclear option” because those who own our debt would be fools to dump it, effectively making these bonds junk, but it is this influence that these potential actions have on our nation that should concern us the most. If we cede this power to others through undisciplined spending, we are effectively selling our nation to the rest of the world.
In a comment on my previous post, Rick with the Freedonian asked about our trade deficit with China. Here are the numbers from the US Census bureau. Rick is right that the trade deficit has risen dramatically. In 2001 it stood at $83b/yr. 2003 it rose to $124b/yr. 2006, according to the Foreign Trade Statistics site on the Census.gov site it stood at $231b/yr, increasing nearly 280% in 6 years.
Trade is an important part of every nation’s economic health. Unfortunately, where China is concerned, we are so far out of balance with no end in sight, that by importing more goods from China we are damaging our future fiscal stability and further devaluing our currency, putting us in a classic Catch 22, more debt and less buying power.
This is not a call to end trade with China, nor is it a Pat Buchanan type xenophobic call to make China some kind of boogeyman. We must put our trade deficit with China more into balance and work to buy back as much of our debt as quickly possible. The genie must be put back in the bottle. Until we do so, our nation’s fiscal security rests in the hands of someone else.