I.O.U.S.A - Addison Wiggin [37]
Figure 4.2b Public, Private Debt: Debt Held by Foreigners — 2007
Source: President ’ s 2008 budget.
its $ 1.3 trillion in U.S. Treasuries if the U.S. government continued to insist on placing tariffs on Chinese exports. Basically, the Chinese were fl exing their economic muscles. Since 2005, when China depegged its currency, the yuan, from the U.S. dollar, the United States has been on China ’ s case to revalue the yuan, or 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, ” explains Paul Craig Roberts in an article called
“ China ’ s Threat to the Dollar is Real,”
published by CounterPunch on August 9, 2007. ” “ 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 United States to decline, as they would be more expensive. This would end, Washington thinks, the large trade defi cit that the United States has with China. ”
In order to force the yuan revaluation, the United States was threatening to impose trade sanctions on Chinese goods.
In response, China threatened to dump its Treasury holdings —
a move that the media coined China ’ s “ nuclear option, ” since this act would destroy the U.S. dollar. This struck a cord with c04.indd 71
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72 The
Mission
U.S. offi cials who were well aware that the Chinese had them over a barrel.
Paul Craig Roberts continues: “ Despite China ’ s support of the Treasury bond market, China ’ s large holdings of dollar -
denominated fi nancial 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 refl ect the creditor status China acquired when U.S. corporations off - shored their production to China. Reportedly, 70 percent of the goods on Wal - Mart ’ s shelves are made in China.
“ China has gained technology and business knowhow from the U.S. fi rms that have moved their plants to China.
China has large coastal cities, choked with economic activity and traffi c, 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 four to fi ve times more populous than America ’ s. ”
In other words: China gets what it wants.
Financial Warfare
Financial warfare similar to what China was threatening in the summer of 2007
isn ’ t unheard of. In fact, it has happened before.
In the fall of 1956, the world was on the brink of a major international confl ict.
America ’ s allies, Britain and France, were engaged in a battle against Egypt over control of the Suez Canal, a large man - made canal in Egypt. Russia was threatening to intervene on the side of Egypt.
America wanted to avoid military action at any cost, and demanded that the British and French allies withdraw from the region. When the United States ’
request was denied, it turned to fi nancial warfare. America, which at that time owned much of England ’ s debt, threatened to sell off a signifi cant part of its (continued)
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Chapter 4 The Trade Defi cit 73
(continued)
holdings in the British pound. This would have effectively destroyed England ’ s currency.
As a result, all British and French military forces withdrew from the Suez region within weeks. Some historians consider this the exact moment that the British Empire ceased to exist.
Solutions
Last year, the United States borrowed 65 percent of all the money that was borrowed in the world — 10 times as much as the next biggest borrower.
“ If fi fteen or twenty years from now two or three percent of the GDP, ” says Warren Buffett, “ is being paid abroad merely to service the debts or the ownership of assets that occurred because we ’ re overconsuming, that will be politically