Uncle Sam, Your Banker Will See You Now


Early this morning China let the idiots in
Washington, and on Wall Street, know that it has them by
the short hairs. Two senior spokesmen for the Chinese
government 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
."
[China
threatens `nuclear option` of dollar sales
By
Ambrose Evans-Pritchard, London Telegraph, August
9, 2007]

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."

If Western financial markets are sufficiently
intelligent to comprehend the message, US interest rates
will rise regardless of any further action by China. At
this point, China does not need to sell a single bond.
In an instant, China has made it clear that US interest
rates depend on China, not on the Federal Reserve.

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.

Strategic thinkers, if any remain who have not been
purged by neocons, will quickly conclude that China`s
power over the value of the dollar and US interest rates
also gives China power over US foreign policy. The US
was able to attack Afghanistan and Iraq only because
China provided the largest part of the financing for
Bush`s wars.

If China ceased to buy US Treasuries, Bush`s wars
would end. The savings rate of US consumers is
essentially zero, and several million are afflicted with
mortgages that they cannot afford. With Bush`s budget in
deficit and with no room in the US consumer`s budget for
a tax increase, Bush`s wars can only be financed by
foreigners.

No country on earth, except for Israel, supports the
Bush regimes` desire to attack Iran. 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.

The US, of course, has no foreign reserves with which
to make the purchase. The impact of such a large sale on
US interest rates would wreck the US economy and
effectively end Bush`s war-making capability. Moreover,
other governments would likely follow the Chinese lead,
as the main support for the US dollar has been China`s
willingness to accumulate them. If the largest holder
dumped the dollar, other countries would dump dollars,
too.

The value and purchasing power of the US dollar would
fall. When hard-pressed Americans went to Wal-Mart to
make their purchases, the new prices would make them
think they had wandered into Nieman Marcus. Americans
would not be able to maintain their current living
standard.

Simultaneously, Americans would be hit either with
tax increases in order to close a budget deficit that
foreigners will no longer finance or with large cuts in
income security programs. The only other source of
budgetary finance would be for the government to print
money to pay its bills. In this event, Americans would
experience inflation in addition to higher prices from
dollar devaluation.

This is a grim outlook. We got in this position
because our leaders are ignorant fools. So are our
economists, many of whom are paid shills for some
interest group. So are our corporate leaders whose greed
gave China power over the US by offshoring the US
production of goods and services to China. It was the
corporate fat cats who turned US Gross Domestic Product
into Chinese imports, and it was the "free trade,
free market economists"
who egged it on.

How did a people as stupid as Americans get so full
of hubris?

COPYRIGHT

CREATORS SYNDICATE, INC.


Paul Craig Roberts

[
email
him
] was Assistant
Secretary of the Treasury in the Reagan Administration.
He is the author of


Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
;
 Alienation
and the Soviet Economy
and

Meltdown: Inside the Soviet Economy
,
and is the co-author with Lawrence M. Stratton of


The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

here
for Peter
Brimelow`s
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.