China's Greatest Weapon and How to Destroy It
By Alex Holt, International Affairs Staff Writer
In the famous suspense comedy Dr. Strangelove, Stanley Kubrick imagines the Russians possess a "doomsday device"- something that would spread nuclear Holocaust all over, killing the Russians, the Americans, and everyone else on the planet. The purpose of the device was that to serve as the ultimate deterrent, making it the ultimate bargaining chip, so that nobody would ever attack the Russians if a doomsday device would be automatically activated. The doomsday device did not really exist when Kubrick wrote the film, but it does now, sort of.
The Origins of the Doomsday Device
As we learned at the collapse of the cold war, weapons are no longer the only source of power, but immense power can now come from money. The economic superpower is also the world superpower, and that is by no means a coincidence. Now that power derives from the economy, so does the doomsday device, but the United States must have misplaced the machine because it no longer in our hands, but rather in China's.
Over the years, we, the U.S., have been very sloppy about how we trade our currency. Much of the blame lies with Congress; the federal government has a habit of spending more than it taxes. Over the past twenty years we have (almost) always run a deficit. So how do we pay for everything if we spend more than we tax? The answer, as anyone who went to one macroeconomics class knows, is not by creating more money, but by taking out loans.
The U.S. Treasury issues massive bonds to foreign governments, who have been only too willing to invest in the most stable currency in the world backed by the country that can always help the little guy out in a jam. In a way this approach makes sense, Alexander Hamilton thought we should have a national debt because then people who owned the bonds had a vested interest in the country succeeding. Today, spreading our money around helps keep the value of the dollar high; since countries who have invested in the U.S. dollar want to see it appreciate, everybody wins. Our downfall, therefore, would not be from taking loans from many countries, it would be from taking huge loans from a few countries. The unfortunate truth is, we aren't very diversified.
Money Talks
Japan actually holds the greatest amount of U.S. dollars in its reserves. Though the amount they hold is worrisome, Japan is a staunch ally, and since its economy relies so heavily on the U.S., we needn’t worry about any sudden moves. China, however, is a different story. They hold the second largest amount of reserves of U.S. dollars; the Washington Post estimates that China holds an excess of $1 trillion in foreign exchange reserves, at least $700 billion of which is U.S. currency (our estimated national public debt is just under $9 trillion).
The Apocalypse Scenario
If China got rid of all of their U.S. currency, the outcome would be disastrous for everyone, except, perhaps, for those who have invested all their money in gold. The value of the dollar would fall dramatically; the inflation rate would increase so quickly that people might actually wish for 1979 conditions. Panic would set in, and every foreign government, especially Japan, would start looking to sell off their U.S. currency. China would lose vast amounts of money immediately, as they would not be able to sell their dollars off quickly enough to avoid large losses. Japan's economy would probably suffer worst, an idea that appeals to the Chinese, as they would be brought to their knees with their even larger losses. The U.S. economy would effectively come to a halt, creating the biggest financial crisis the world has ever known. Europe and Asia would be decimated as the U.S. halted all imports of their goods because Americans would no longer have any disposable income. The prosperity that globalization had reaped up until this point, would come crashing down in days.
This scenario is incredibly unlikely because nobody, especially China, would benefit from doing this. Yet who exactly was going to benefit if Russia attacked the U.S. with nuclear weapons, or vice-versa? The reason China has an upper hand is because it is this economic threat that is their doomsday device.
That it seems unlikely that China would actually use this device does not mean they won't use it as a threat, in fact, they already have. On August 9, 2007, the National Business Review reported that two Chinese Communist Party officials recently mentioned using the device as such an action. "The plan was described as China's 'nuclear option' in the Chinese press. Xia Bin, finance chief at the Development Research Center - a Cabinet rank position - launched 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 U.S." The official then added, "Of course, China doesn't want any undesirable phenomenon in the global financial order." No, of course not, unless you don't get what you want.
Rewiring the Doomsday Device
The reason this particular threat is so frustrating, is that, unlike nuclear weapons, there is an easy solution - we buy it back. Not all of it, possibly a majority of it, sell some of it to other countries, and use most of it to pay back our national debt.
This would require significant sacrifice on the part of Americans. We would need to either raise taxes, cut spending, or both. Taxing more and spending less on pork barrel projects is a politician’s worst nightmare, so this problem will likely not be solved.
The one hope may lie in Americans' current attitude about sacrificing for national security purposes. The current dilemma we face with China's foreign reserves is a matter of national security, and Americans are certainly willing to spend more in the name of national security, but would we be willing to spend less in the same name? I would not be surprised if lobbyists were investing in gold.