China’s intention in querying the capability of the U.S. to honor its foreign debt obligations became clearer today.
As I said in an earlier post, why would China cast doubt publicly on the ability of the U.S. to fund its debt when it could only harm China’s chance of being repaid.
Well now the cat is out of the bag. As reported by the New York Times, China wants to replace the dollar as ‘the’ international currency.
The following quote sums it up. And it illustrates how vulnerable the U.S. is to a combined economic attack from China, Russia, and OPEC.
OPEC could change its currency of transaction by simple agreement between its members, but to blunt the U.S. as a dominant power needs a more concerted effort.
This is the Cold War by economic means.
Nicholas Lardy, an economist and China specialist at the Peterson Institute in Washington, said that through its proposal, China was indicating that the dollar’s long dominance was unfair, allowing the United States to run huge deficits by borrowing from abroad, and that the risks to holders of Treasuries were growing.
“Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold,” Mr. Lardy said. “It is a legitimate concern.”