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The China Syndrome
The China Syndrome
Friday 28 January 2005 @ 11:34
The fragility of the American economy is not found in esoteric
indicators like consumer spending, though that is important, but in
the kindness of our so-called enemies.

Take China, for example, the big Red menace looming beyond the
California tide. Most see China as our next big economic and
military competitor, some sort of Soviet Union Mark II just waiting
to explode onto the scene.

Yet few people really understand that China, right now, has the
power to cripple this country without firing a shot. Why? Because
they buy our debt. No, strike that. Because they buy our staggering
debt, and if they decide to stop doing that, our economy will be
mortally wounded.

Robert Kuttner explains it in his recent article from the American

Countries go broke gradually, by borrowing so much money that
creditors lose confidence in their ability to pay the debt back.
Then, they go broke suddenly as creditors stop lending.

This has happened to more than a dozen third-world nations, who had
the additional misfortune of having to borrow in dollars. As their
own currency lost the confidence of world markets, they lost value
against the dollar. This only increased their real debt burden. The
optimists say, ''It can't happen here."

First, we're the people who print dollars. So if the dollar is
losing value, it just means the money that we owe the rest of the
world is getting cheaper. Lucky us.

Second, we enjoy a codependency with our creditors. For instance,
China, which keeps lending us money to finance our deficits, may be
accumulating dollar credits that are losing their real worth. But
China needs us to keep absorbing their products, so China will go
right on lending.

Kuttner goes on to explain the nightmare scenario:

Yesterday, the bipartisan Congressional Budget Office (CBO),
possibly the last intellectually honest government agency in George
W. Bush's Washington, reported that our fiscal situation is even
worse than expected.

According to the CBO's latest ''Budget and Economic Outlook," the
projected deficit for 2005 will be about $400 billion. The CBO
declares, politely but unmistakably, that it doesn't buy the Bush
administration's budgetary gimmickry of trying to keep anticipated
military outlays out of the official budget.

''The absence of further appropriations for activities in Iraq and
Afghanistan," CBO states, ''masks a further deterioration in budget
projections over the [next] ten years."

Specifically, the deficit for the next decade is $504 billion worse
than anticipated in CBO's previous estimate last September.

Finally, from Kuttner, comes the fear:

As for the Chinese, Clyde Prestowitz of the Economic Strategy
Institute, formerly a senior trade negotiator in the Reagan
administration, offers the following scenario: In a future crisis
involving the tense China-Taiwan relationship, the Chinese
ambassador suggests to Secretary of State Condoleezza Rice that
maybe the United States would like to move its warships 500 miles
away from Taiwan. Rice demurs. The next day, the Bank of China sells
a few -- just a very few to get our attention -- U.S. Treasury
securities. Money markets reel.

Would the Chinese play such a risky game? They have their own
interests, geopolitical as well as economic. They are certainly not
an American pawn, less so with every passing year. Miscalculations
have happened in world economic relations before, and with
calamitous results.

Would the Chinese play such a risky game? Take a close look at this
article from Wednesday's Associated Press wire:

China has lost faith in the stability of the U.S. dollar and its
first priority is to broaden the exchange rate for its currency from
the dollar to a more flexible basket of currencies, a top Chinese
economist said Wednesday at the World Economic Forum.

At a standing-room only session focusing on the world's fastest-
growing economy, Fan Gang, director of the National Economic
Research Institute at the China Reform Foundation, said the issue
for China isn't whether to devalue the yuan but "to limit it from
the U.S. dollar."

"The U.S. dollar is no longer ? in our opinion is no longer ? (seen)
as a stable currency, and is devaluating all the time, and that's
putting troubles all the time," Fan said, speaking in English. "So
the real issue is how to change the regime from a U.S. dollar
pegging ... to a more manageable...reference...say Euros, yen,
dollars ? those kind of more diversified systems," he said.

Journalist Seymour Hersh buttressed this assessment in a recent
interview with Democracy Now:

"Another salvation may be the economy. It's going to go very bad,
folks. You know, if you have not sold your stocks and bought
property in Italy, you better do it quick. And the third thing is
Europe -- Europe is not going to tolerate us much longer. The rage
there is enormous. I'm talking about our old-fashioned allies. We
could see something there, collective action against us. Certainly,
nobody -- it's going to be an awful lot of dancing on our graves as
the dollar goes bad and everybody stops buying our bonds, our
credit -- our -- we're spending $2 billion a day to float the debt,
and one of these days, the Japanese and the Russians, everybody is
going to start buying oil in Euros instead of dollars. We're going
to see enormous panic here. But he could get through that. That will
be another year, and the damage he's going to do between then and
now is enormous. We're going to have some very bad months ahead."

Anyone who buys into the Bush administration idea that this nation
can go it alone without the rest of the world needs a few refresher
courses in Economics 101. The minute the rest of the world gets
tired of our belligerence, they can turn us off economically as
easily as flicking a light switch.