Economic warfare

From The Telegraph:

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

It is an article of faith among libertarians that economic ties between nations make conflict between them far less likely, even impossible. The old saying is that borders which are crossed by commerce will not be crossed by soldiers. This would lead a libertarian economist to declare that China's threat is empty because China would lose the majority of the value of its investment in US dollars if it triggered a collapse of the dollar.

However the libertarian economists forget that a nation which is fighting a war makes very large investments into things which might very well be destroyed. Aircraft carriers and nuclear submarines are things which can and will be expended in the event of war.

Economists make the assumption that on one will waste a trillion dollar investment, but what if you have invested in a trillion dollar weapon?