Borrow $10,000, and the bank owns you.

Borrow $10 billion and you own the bank.

T-bills and T-notes are held in registered form, and IIRC the government is the transfer agent -- which means that the U.S. Government effectively controls the buying and selling of those securities. Imagine this:

Day 2: Secretary of State Rice and Secretary of the Treasury Snow hold a joint press conference, at which they announce that the U.S. Treasury is suspending interest payments on all Treasury securities held by the Bank of China and any other institution owned or controlled by the Chinese government. The Treasury Department also announced that it will not permit these securities to be re-registered to any other party while the interest payments are suspended.

"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."

Why would the Chinese peg the rmb at half its true value againt the dollar? If they floated the rmb, most traders think it would double. But their exports would go down and they would get fewer dollars in return. Clearly, they want the dollars and are willing to work cheap to get them.

Mike
That would destroy the dollar everywhere.

Day 3

Fed Reserve Chairman Greenspan said there was apparently an irrationally exuberant misinterpretaion of the misunderestimation of the totally baseless, bogus, and bolixed statement from the Treasury Dept yesterday.

h:

So what?

Prestowitz has written a book blaming pretty much every perceived horrible in American foreign policy on supporters of Israel, Taiwan and a free Cuba. One imagines he was no supporter of Jackson-Vanik or those of us who used the phrase 'Captive Nations' until the Soviet Union collapsed. He will sell anyone the rope by which they hang us.

Robert has it pretty much right, as usual.

OJ
Strengthing of competing currencies (Euro, Gold) and depreciation of the dollar. If you are thinking of effects on average American Americans there would be hyper-inflation of the dollar. Destroying dollar denominated credit instruments, so that old people like me would have to go back to work.

French tourists in America would smirk at the yokels..ahh nevermind too horrible to contemplate.

The reason would be because people would realize
that the American government could not be relied upon to pay interest on their debts. Look at this way a the Chinese would not keep dollars as their reserve currency when they have alternatives that are paying interest and which they can trade to any person for product. Like the Euro.

American Business, in order to purhase products would need to first buy Euros to puchase the Chinese Product. But the issuers of the Euro (EU) likewise would lose confidence in the Dollar and so why would they accept them anymore so than the Chinese. Ad infinitum to every country. US products would become more expensive to produce, without the benefit of international trade and hence inflation in America.

If you say so what to that senario, then fine, but I believe it would make life more difficult for holders of Dollars and Dollar denominated assets. By the way it's immoral to agree to do something and then not do it, but what the h*ll I'm not trying to hardnose about it.

h:

America and China go to war and we repudiate our debt to them and you think the rest of the world economy doesn't tank?

h,

Europe has zero growth, negative real growth and double digit unemployment. They are going to have to devalue the currency eventually, or they will atrophy their economies completely. The PRC has refused to allow its currency to trade at the level it would in a free market. It does this because they have hundreds of millions of unskilled workers who have to be employed producing dreck somehow. Even with their artificially low currency, they still have grotesque economic problems, including literally tens of millions of itinerant unemployed. If the Renminbi traded at its real value, the Chinese would price themselves out of world markets and the manufacturers would flee.

Hoarding gold is a fool's errand as anyone around in the 70s can tell you.

A decreasing dollar would make it profitable to manufacture in America again, as well as drill for oil and natural gas. The trade deficit, an illusory measure anyway, would soon become a surplus.

America and China aren't going to war anytime soon. The Chinese just say this crap every so often to let us know they're out there and to bluff us into surrender. They have plenty of help in America from the loony left but more importantly also from that particularly swinish section of the business community which wants to trade with anyone at any cost. The Prestowitzes of the world would happily have bought German-manufactured soap and lampshades during the 40s if they could have made a profit from it.

A war between the US and China would dry up Chinese exports, killing the Chinese economy which is far more precarious than their PR people would have us believe.

I missed the comment about War. Where exactly was there mention of War?

What was mentioned was an attempt by the Chinese to pressure the US or threaten to sell dollars? A trite issue. Who cares who possesses the dollar? Chinese or Soros or the Social Security Administration.

What Mike suggested was that US Debt be made non transferable by the Chinese and that no interest be paid. If the Chinese want to sell Dollars (or treasury bills), so what. If the US sets precedent to make the Dollar unsalable, then all hell breaks loose. Unless of course previous agreements required the Chinese to retain the dollars.

Now you bring up War.

The topic is war. But you've nicely illustrated that folks don't think it through.

This scenario is absurd. It is simply not an option for China, it screws way to many people.

Day 1: 8:00pm est. President Bush makes press conference from the East Room of the White House with Japanese, British, Austrailian, Polish, German, Korean, Indian, Russian, Vietamese, Indonesean, and Tawainese ambassadors. Tells America and the world exactly what happened, the assorted nations assure the world that "we will buy all they sell", President suggests Americans pick up some cheap T-Bills tomorrow.

Peking 3 hours later: Finance Minister found dead of a heart attack. Foriegn Minister missing.

Peking 12 hours later: New Party leadership elected, blames monetary crisis on "rouge reactionary elements" lead by Foriegn minister, guarantees "swift response".

Bart: Thank You.

The dollar will remain the reserve currency. The Euro market isn't remotely deep enough, and the economy will stagnate at best. There's nowhere else to go.

And besides Prestowitz was preaching gloom and doom in the late 1980s due to the Japanese...

OJ, thank you for complimenting my cluelessness.

The dollar has attributes (like gold, real estate, Euros) that give it value. I was reacting to the assertion that the way to keep the value of the dollar up was to remove or threaten one on those attributes. (its tranferability) That approach will not work.

To move from that to War, wasn't obvious to me. By the way to threaten war, with any country which 1) has dollars and 2) decides to no longer have them, would seem to me to lower the value of the dollar even more.

h:

The premise is war:

"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 -- US Treasury securities. Money markets reel."

The idea that an American president would respond by backing down ignores history and current political reality. We hold all the cards in such a confrontation, from monetary to nuclear.