What Happens When China Moves Against The U.S. Dollar?

From Michael Snyder’s Economic Collapse blog:

In order for our current level of debt-fueled prosperity to continue, the rest of the world must continue to use our dollars to trade with one another and must continue to buy our debt at ridiculously low interest rates.  Of course the number one foreign nation that we depend on to participate in our system is China.  China accounts for more global trade than anyone else on the planet (including the United States), and most of that trade is conducted in U.S. dollars.  This keeps demand for our dollars very high, and it ensures that we can import massive quantities of goods from overseas at very low cost.  As a major exporting nation, China ends up with gigantic piles of our dollars.  They lend many of those dollars back to us at ridiculously low interest rates.  At this point, China owns more of our national debt than any other country does.  But if China was to decide to quit playing our game and started moving away from U.S. dollars and U.S. debt, our economic prosperity could disappear very rapidly.  Demand for the U.S. dollar would fall and prices would go up.  And interest rates on our debt and everything else in our financial system would go up to crippling levels.  So it is absolutely critical to our financial future that China continues to play our game.

Unfortunately, there are signs that China has now decided to start looking for a smooth exit from the game.  In November, I wrote about how the central bank of China has announced that it is “no longer in China’s favor to accumulate foreign-exchange reserves”.  That means that the pile of U.S. dollars that China is sitting on is not going to get any higher.

I deeply wish that I could poke holes all through Snyder’s reasoning and his facts. I wish I could. I can’t. Have you checked that financial seatbelt and personal back-up plan lately?

Interest rates—if they rise to historical norms, the U.S. budget is burned toast (and I should actually write: when they rise to historical norms…).

Derivatives—the Federal Reserve system has pushed us out onto a piece of frayed string, suspended over a massive canyon of financial ruin. Right now, the Wall Street casino is reasonably happy, the wolves are still prowling, and the bubbly is flowing, but that can change in an instant.

Snyder’s quotation of Paul Farrell is especially relevant:

Early warnings of a crash are dismissed over and over (‘just a temporary correction’). They gradually numb us about the inevitable. Time after time we forget history’s lessons. Until finally a big surprise catches us totally off-guard. Financial historian Niall Ferguson put it this way: Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash.

Till then, life just goes along quietly, hypnotizing us, making us vulnerable, till a shocker like Lehman Brothers upsets the balance.