Is War With China Inevitable?

Tyler Durden's picture

Submitted by Brandon Smith of Alt-Market blog,

As a general rule, extreme economic decline is almost always followed by extreme international conflict. Sometimes, these disasters can be attributed to the human survival imperative and the desire to accumulate resources during crisis. But most often, war amid fiscal distress is usually a means for the political and financial elite to distract the masses away from their empty wallets and empty stomachs.

War galvanizes societies, usually under false pretenses. I’m not talking about superficial “police actions” or absurd crusades to “spread democracy” to Third World enclaves that don’t want it. No, I’m talking about REAL war: war that threatens the fabric of a culture, war that tumbles violently across people’s doorsteps. The reality of near-total annihilation is what oligarchs use to avoid blame for economic distress while molding nations and populations.

Because of the very predictable correlation between financial catastrophe and military conflagration, it makes quite a bit of sense for Americans today to be concerned. Never before in history has our country been so close to full-spectrum economic collapse, the kind that kills currencies and simultaneously plunges hundreds of millions of people into poverty. It is a collapse that has progressed thanks to the deliberate efforts of international financiers and central banks. It only follows that the mind-boggling scale of the situation would “require” a grand distraction to match.

It is difficult to predict what form this distraction will take and where it will begin, primarily because the elites have so many options. The Mideast is certainly an ever-looming possibility. Iran is a viable catalyst. Syria is not entirely off the table. Saudi Arabia and Israel are now essentially working together, forming a strange alliance that could promise considerable turmoil — even without the aid of the United States. Plenty of Americans still fear the Al Qaeda bogeyman, and a terrorist attack is not hard to fabricate. However, when I look at the shift of economic power and military deployment, the potential danger areas appear to be growing not only in the dry deserts of Syria and Iran, but also in the politically volatile waters of the East China Sea.

China is THE key to any outright implosion of the U.S. monetary system. Other countries, like Saudi Arabia, may play a part; but ultimately it will be China that deals the decisive blow against the dollar’s world reserve status. China’s dollar and Treasury bond holdings could be used as a weapon to trigger a global sell-off of dollar-denominated assets. China has stopped future increases of dollar forex holdings, and has cut the use of the dollar in bilateral trade agreements with multiple countries.  Oil-producing nations are shifting alliances to China because it is now the world’s largest consumer of petroleum. And, China has clearly been preparing for this eventuality for years. So, given these circumstances, how can the U.S. government conceive of confrontation with the East? Challenging one’s creditors to a duel does not usually end well. At the very least, it would be economic suicide. But perhaps that is the point. Perhaps America is meant to make this seemingly idiotic leap.

Here are just some of the signs of a buildup to conflict...

Currency Wars And Shooting Wars

In March 2009, U.S. military and intelligence officials gathered to participate in a simulated war game, a hypothetical economic struggle between the United States and China.

The conclusions of the war game were ominous. The participants determined that there was no way for the United States to win in an economic battle with China. The Chinese had a counterstrategy to every U.S. effort and an ace up their sleeve – namely, their U.S. dollar reserves, which they could use as a monetary neutron bomb, a chain reaction that would result in the abandonment of the dollar by exporters around the world . They also found that China has been quietly accumulating hard assets (including land and gold) across globe, using sovereign wealth funds, government-controlled front companies, and private equity funds to make the purchases. China could use these tangible assets as a hedge to protect against the eventual devaluation of its U.S. dollar and Treasury holdings, meaning the losses on its remaining U.S. financial investments was acceptable should it decide to crush the dollar.

The natural response of those skeptical of the war game and its findings is to claim that the American military would be the ultimate trump card and probable response to a Chinese economic threat. Of course, China’s relationship with Russia suggests a possible alliance against such an action and would definitely negate the use of nuclear weapons (unless the elites plan nuclear Armageddon). That said, it is highly likely that the U.S. government would respond with military action to a Chinese dollar dump, not unlike Germany’s rise to militarization and totalitarianism after the hyperinflationary implosion of the mark. The idea that anyone except the internationalists could “win” such a venture, though, is foolish.

I would suggest that this may actually be the plan of globalists in the United States and their counterparts in Asia and Europe. China’s rise to financial prominence is not due to its economic prowess. In fact, China is ripe with poor fiscal judgment calls and infrastructure projects that have gone nowhere. But what China does have on its side are massive capital inflows from global banks and corporations, mainly based in the United States and the European Union. And, it has help in the spread of its currency (the Yuan) from entities like JPMorgan Chase and Co. The International Monetary Fund is seeking to include China in its global basket currency, the SDR, which would give China even more leverage to use in breaking the dollar’s reserve status. Corporate financiers and central bankers have made it more than possible for China to kill the dollar, which they openly suggest is a “good thing.”

Is it possible that the war game scenarios carried out by the Pentagon and elitist think-tanks like the RAND Corporation were not meant to prevent a war with China, but to ensure one takes place?

The Senkaku Islands

Every terrible war has a trigger point, an event that history books later claim “started it all.” For the Spanish-American War, it was the bombing of the USS Maine. For World War I it was the assassination of Archduke Franz Ferdinand of Austria. For U.S. involvement in World War I, it was the sinking of the Lusitania by a German U-Boat. For U.S. involvement in World War II, it was the attack on Pearl Harbor. For Vietnam, it was the Gulf of Tonkin Incident (I recommend readers look into the hidden history behind all of these events). While the initial outbreak of war always appears to be spontaneous, the reality is that most wars are planned far in advance.

As evidence indicates, China has been deliberately positioned to levy an economic blow against the United States. Our government is fully aware what the results of that attack will be, considering they have gamed the scenario multiple times. And, by RAND Corporation’s own admission, China and the United States have been preparing for physical confrontation for some time, centered on the concept of pre-emptive strikes.  Meaning, the response both sides have exclusively trained for in the event of confrontation is to attack the other first!

The seemingly simple and petty dispute over the Senkaku Islands in the East China Sea actually provides a perfect environment for the pre-emptive powder keg to explode.

China has recently declared an “air defense zone” that extends over the islands, which Japan has already claimed as its own. China, South Korea and the United States have all moved to defy this defense zone. South Korea has even extended its own air defense zone to overlap China’s.

China has responded with warnings that its military aircraft will now monitor the region and demands that other nations provide it with civilian airline flight paths.  China has also stated that it plans to create MORE arbitrary defense zones in the near future.

The U.S. government under Barack Obama has long planned a military shift into the Pacific, which is meant specifically to counter China’s increased presence. It’s almost as if the White House knew a confrontation was coming.

The shift is now accelerating due to the Senkaku situation, as the U.S. transfers submarine-hunting jets to Japan while pledging full support for Japan should war ignite.

And most recently, the Japanese press has suggested that war between the two countries could erupt as early as January.

China, with its limited navy, has focused more of its energy and funding into advanced missile technologies — including “ship killers,” which fly too low and fast to be detected with current radar.  This is the same strategy of cheap compact precision warfare being adopted by countries like Syria and Iran, and it is designed specifically to disrupt tradition American military tactics.

Currently, very little diplomatic headway has been made or attempted in regards to the Senkaku Islands. The culmination of various ingredients so far makes for a sour stew.

All that is required now is that one trigger event — that one ironic “twist of fate” that mainstream historians love so much, the spark that lights the fuse. China could suddenly sell a mass quantity of U.S. Treasuries, perhaps in response to the renewed debt debate next spring. The United States could use pre-emption to take down a Chinese military plane or submarine.  A random missile could destroy a passenger airliner traveling through the defense zone, and both sides could blame each other. The point is nothing good could come from the escalation over Senkaku.

Why Is War Useful?

What could possibly be gained by fomenting a war between the United States and China?  What could possibly be gained by throwing America's economy, the supposed "goose that lays the golden eggs", to the fiscal wolves?  As stated earlier, distraction is paramount, and fear is valuable political and social capital.

Global financiers created the circumstances that have led to America’s probable economic demise, but they don’t want to be blamed for it. War provides the perfect cover for monetary collapse, and a war with China might become the cover to end all covers. The resulting fiscal damage and the terror Americans would face could be overwhelming. Activists who question the legitimacy of the U.S. government and its actions, once considered champions of free speech, could easily be labeled “treasonous” during wartime by authorities and the frightened masses. (If the government is willing to use the Internal Revenue Service against us today, just think about who it will send after us during the chaos of a losing war tomorrow.) A lockdown of civil liberties could be instituted behind the fog of this national panic.

Primarily, war tends to influence the masses to agree to more centralization, to relinquish their rights in the name of the “greater good”, and to accept less transparency in government and more power in the hands of fewer people. Most important, though, is war's usefulness as a philosophical manipulation after the dust has settled.

After nearly every war of the 20th and 21st century, the subsequent propaganda implies one message in particular: National sovereignty, or nationalism, is the cause of all our problems. The establishment then claims that there is only one solution that will solve these problems: globalization. This article by Andrew Hunter, the chairman of the Australian Fabian Society, is exactly the kind of narrative I expect to hear if conflict arises between the United States and China.

National identity and sovereignty are the scapegoats, and the Fabians (globalist propagandists) are quick to point a finger. Their assertion is that nation states should no longer exist, borders should be erased and a one-world economic system and government should be founded. Only then will war and financial strife end. Who will be in charge of this interdependent one world utopia? I’ll give you three guesses...

The Fabians, of course, make no mention of global bankers and their instigation of nearly every war and depression for the past 100 years; and these are invariably the same people that will end up in positions of authority if globalization comes to fruition. What the majority of people do not yet understand is that globalists have no loyalties to any particular country, and they are perfectly willing to sacrifice governments, economies, even entire cultures, in the pursuit of their "ideal society".  "Order out of chaos" is their motto, after all.  The bottom line is that a war between China and the United States will not be caused by national sovereignty. Rather, it will be caused by elitists looking for a way to END national sovereignty. That’s why such a hypothetical conflict, a conflict that has been gamed by think tanks for years, is likely to be forced into reality.

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suicidalpsychologist's picture

same old story repeating itself over and over again...


Already explained in:


Dont read if even slightly depressed...

Skateboarder's picture

They even said in one of the "fuck you" videos to us: "there's a one-a-birrion of us and onri three hundred mirrion of you. It crearry wourd'nt work."

edit: only skimmed it, but the funny part is, whatever he wrote has been written jillions of times already. This just happens to be the last iteration. ;)

SafelyGraze's picture

if all the current and former students sending money and/or communications to family in prc are labeled as associating-with-the-bad-guys per ndaa, then US tech grinds to an instant halt

on the plus side, less crowded halls at mit


AlaricBalth's picture

At least now after reading this article, we can conclude that the ghost cities in China were not a result of Sino irrational exuberance. It was in preparation for war and mass relocation of a displaced populace from the missile ravaged cities of eastern China.

(Its a theory anyway)

For the record, my two years (early 2000's) in China were some of the best times that I have enjoyed. The people were polite and industrious. The history and tradition was awe inspiring. And the dedication to ones extended family was honorable. In lieu of war perhaps we could re-learn from many Chinese the values we seem to have forgotten in the US.

SafelyGraze's picture

every time I think I've learned how to not get despondent when reading zh, something like this gets posted


Bangin7GramRocks's picture

No war with china. Who would make our supplies? Are there even enough textile mills left to cloth our soldiers? We won World War 2 because of our industrial might. Sadly, the US doesn't have any industrial might left. China does.

markmotive's picture

We may one day go nuclear with China. And it will likely be due to an error of judgement rather than an act of war. Just like the 9 nuclear close calls of the 20th century.

ACP's picture

Or maybe a planned event. Maybe Mutually Assured Economic Expansion will replace Mutually Assured Destruction?

wintermute's picture

Wow! Good thing Obama has the Nobel Peace Prize.

He'll make sure a sensible diplomatic solution is found.

Night, night. Sleep tight.

Manthong's picture

OK, so they have an overwhelming hedge of a billion or so folks...

the smog there is worse than a nuclear winter.

what could go wrong?

Ayr Rand's picture

The authors are ignorant on many counts. For example, dollar dump.

First, the Chinese US Treasury holdings are all held by the Fed in trust. The Fed or Treasury could simply zeroize the value of those bonds, or refuse to make them negotiable (same thing). In other words, zero leverage. Maybe less than zero. 

Second, does anybody really think China and Russia will ally? They are the principal competitors on the planet. And even if they did, so what? Russia is a country that has already defaulted on its debt (hence its low debt/GDP) and China's debt is very high and increasing faster than any other country. These are the debt pariahs of the world, who covet each other's lands and resources. 

Fukushima Sam's picture

If we go to war with China it will probably be due to the fact that Chinese are generally assholes.

runningman18's picture

"The Fed or Treasury could simply zeroize the value of those bonds, or refuse to make them negotiable (same thing). In other words, zero leverage. Maybe less than zero"

The fed could do whatever it wants, but they can't force the Chinese or any other nation to continue using the dollar as a reserve currency, so your point is basically irrelevant.  At this point, the dollar will collapse regardless of how the fed or the treasury respond.

As far as China and Russia are concerned, they will always ally where the U.S. is involved. Just look at Syria.  Everybody said the Russians and the Chinese wouldn't lift a finger, let alone work together against U.S. interests, and yet, that's exactly what they did.  When people make such assumptions, they always get bit in the ass...

Truthseeker2's picture

They will stir up war, and rumors of war, just like they are doing in the Ukraine.
Civil war has been their weapon of choice lately.

Kiev Protests: Another CIA-Coordinated Color Revolution In Progress


Winston Churchill's picture

Hitler and Stalin worked together.So did Churchill.

War , or the threat of war, makes very strange bedfellows.

The enemy of my enemy is my friend.

Dr. Everett V. Scott's picture



If there is war with China it will be 110% Barak Obama's fault.




Because Obama is the polar opposite of Reagan, whose "peace through strength" was proven to the extent that our opponent at the time, the Soviet Union, collapsed completely without a shot being fired.


If there is any action that entices China to open hostilities, it is Obama's gutting and politicization of our once-great U.S. military.


But then, what should we expect from a Manchurian Candidate?



Bendromeda Strain's picture


Or maybe a planned event. Maybe Mutually Assured Economic Expansion will replace Mutually Assured Destruction?

That would explain the 000000000 launch code... so easy a Krugman can do it!

scrappy's picture

OK - Upfront- I "borrowed" this one.


One day a man decided to retire…

He booked himself on a Caribbean cruise and proceeded to have the time of his life, that is, until the ship sank.

He soon found himself on an island with no other people, no supplies, nothing, only bananas and coconuts.

After about four months, he is lying on the beach one day when the most gorgeous woman he has ever seen rows up to the shore.

In disbelief, he asks, “Where did you come from? How did you get here?”

She replies, “I rowed over from the other side of the island where I landed when my fishing boat sank.”

“Amazing,” he notes. “You were really lucky to have a row boat wash up with you.”

“Oh, this thing?” explains the woman. ” I made the boat out of some raw material I found on the island. The oars were whittled from gum tree branches. I wove the bottom from palm tree branches, and the sides and stern came from an Eucalyptus tree.”

“But, where did you get the tools?”

“Oh, that was no problem,” replied the woman. ” On the south side of the island, a very unusual stratum of alluvial rock is exposed. I found that if I fired it to a certain temperature in a volcanic vent I found just down island, it melted into ductile iron and I used that to make tools and used the tools to make the hardware.”

The guy is stunned.

“Let’s row over to my place,” she says “and I’ll give you a tour.” So, after a short time of rowing, she soon docks the boat at a small hand built wharf. As the man looks to shore, he nearly falls off the boat.
Before him is a long stone walk leading to a cabin and tree house.

While the woman ties up the rowboat with an expertly woven hemp rope, the man can only stare ahead, dumb struck. As they walk into the house, she says casually, “It’s not much, but I call it home. Please sit down.”

“Would you like a drink?”

“No! No thank you,” the man blurts out, still dazed. “I can’t take another drop of coconut juice.”

“Oh, it’s not coconut juice,” winks the woman. “I have a still. How would you like a Jack Daniels neat?”

Trying to hide his continued amazement, the man accepts, and they sit down on her couch to talk. After they exchange their individual survival stories, the woman announces,
“I’m going to slip into something more comfortable. Would you like to take a shower and shave? There’s a razor in the bathroom cabinet upstairs.”
No longer questioning anything, the man goes upstairs into the bathroom. There, in the cabinet is a razor made from a piece of tortoise bone. Two shells honed to a hollow ground edge are fastened on to its end inside a swivel mechanism.

“This woman is amazing,” he muses. “What’s next?”

When he returns, she greets him wearing nothing but a bandana around her blonde locks and some small flowers on tiny vines, each strategically positioned, she smelled faintly of coconut oil. She then beckons for him to sit down next to her.

“Tell me,” she begins suggestively, slithering closer to him, “We’ve both been out here for many months. You must have been lonely. When was the last time you had a really good ride? She stares into his eyes.

He can’t believe what he’s hearing. “You mean…” he swallows excitedly as tears start to form in his eyes,

“You’ve built a Harley?”

AlaricBalth's picture

I ran into her on that same island. After giving me a similar tour, instead of asking me about a good ride, she looked at me with her ocean green eyes and inquired, "would you like to play around?"

I was astonished and replied excitedly, "oh my, you've crafted a set of golf clubs???"

That's when she stabbed me in the neck with her razor sharp, tortoise bone shiv.

Manthong's picture

Nice one.

Nowadays, the gag line would be “You built an X-box with Grand Theft-Auto?”

This is too precious.. really.. I was at the library this evening getting a DVD of “South Pacific” when a 17 or so year old kid ran up to the matron-in-charge exasperated because his time in the computer cube expired and his “game” was still in progress.

I commented “no problema, you are toast now, anyway”.

.. that is what you get when you depend on the government for your all-important games.

G.O.O.D's picture

I ran into her on that same island. After giving me a similar tour, instead of asking me about a good ride, she looked at me with her ocean green eyes and inquired, "you have something I want and I have something you want" I said, "hot damn you mean you have some Copenhagen?"

Jannn's picture

Shanghai Gold Exchange Physical Delivery Equals Chinese Demand, Part 2

Spumoni's picture

Thank you Scrappy...I even had to forward that to my wife.

Chupacabra-322's picture

"values we seem to have forgotten in the US."

I absolutely disagree. We have the NFL & American Idol.

e2thex's picture

In two hundred years it's gonna look a lot different.

czardas's picture

China's population is actually much more exposed than ours.  The vast majority live in a small arc from Biejing to Zhejiang with another mass in Gjangdong.  But why should China suddenly change and get all expansionary?   Chinese history two features - supremacy of the State above the individual and the accompanying xenophobia / inherent racism of the Han (much like the Brahmans).  These haver long prevented her from any relationship other than master-slave even with overwhelming advantages   Seems most the learning is in reverse.  It is they who mimic our cinema, music, literature, science and technology.  

I doubt China wants a near fatal end of her civiziliation (what would happen in a war with the US) but she can hang on for a financial victory.  As her exploitation of Africa and South America reveals, her only interest is enhancing the Chinese state.  

mumcard's picture

You think Obamao would wipe out the Chinese civilization?  I doubt any of our "leaders" have the stones to authorize a single nuclear attack, even if it meant saving America.

Emergency Ward's picture

Now that the War On Terror is entering a quieter time (a change in focus from full-scale occupation to proxy coups, global mass surveillance, regime-topplings and wedding-bombings), Obama, the nerdish, yet violence-prone Commander, continues to try to prove he is the number-one warmonger on the planet (with his veiled threats toward Iran and North Korea and his explicit "Pacific Military Pivot").  Now cue up Biden, Clinton, Rice, Powers, King, McCain, Kerry, Feinstein, the Generals, etc......

Stage is set for anything....Iran could be a practice run....


ich1baN's picture

You started off right, then you ended wrong. US Tech grinds to a halt? What? 


Oldballplayer's picture

Kind of makes you wonder why they are spending money on bitcoin , so they can move it around.

carlnpa's picture

The US has plenty of "tech" guys, they have been displaced by H1B workers.  The H1B tech guys are virtual slaves that work for peanuts compared to US tech guys.

BTW the US tech guys blow away the H1B guys - because they are creative and have not been trained to think as rigidly.

wee-weed up's picture



The ChiComs are carefully weighing Obama's wussy incompetence...

Against their rising war-footing competence.

When they feel they have an advantage...

There WILL be war.

Skateboarder's picture

From a propaganda minister's standpoint, I would blame the smog on the Americans.

wee-weed up's picture



I wouldn't put it past them to blame their smog on America.

But the most important thing they are doing now...

That will help them the most if it comes to war with the US...

Is their massive buying of gold.

They are many things bad... but they're not fools.

Skateboarder's picture

As I keep saying, average Chinese and Indians have the most wealth mobility on the planet. The rest of everyone has worthless digital assets for the most part. The turn of tides will be great. Many a people will be humbled not too long from now!

lewy14's picture

This is almost conventional wisdom now. I find the logic compelling.

Here's how it could be wrong.

Never before in history has our country been so close to full-spectrum economic collapse

A long chart of Treasury prices will belie that notion. Nixon/Ford/Carter came close to killing the dollar; Volker saved it. We're nowhere near that point right now.

In March 2009, U.S. military and intelligence officials gathered to participate in a simulated war game...

...whose models no longer apply, if they ever did. Remember this was March 2009. QE1 hadn't even happened yet. I'm sure if you plugged all the QE into the model it would have scored an "own goal" - we would have destroyed our own currency. Fed printing of four trillion dollars? Cornering our own Treasury market? And the dollar is still going? Really?

I wouldn't have believed it either. But there it is.

China can dump all its dollar assets now... and they'll get scooped up. The world is short of "safe collateral". If interest rates rise here, dollars will flood back home, driving rates down, the currency up, wreaking havoc on Asian markets... seen this play before.

Plus, as Michael Pettis has observed cogently, dollar assets are balanced by yuan PCoB liabilities. China can't dump dollars without messing up its own debt pile. I doubt this was "war gamed" either.

The US doesn't have many friends but the "dollar system" is actually more than the US, and China is more deeply embedded than it wants. If the Chinese people knew the extent to which their system was entwined with ours they'd be bullshit - their vaunted autarky would be exposed as a state myth. Ironically the cynical US population has a better idea of just how tied at the hip we are (thanks, globalization!) And the Chinese don't have that many friends either.

I'm all for the accumulation of real, hard assets, and hats off to the people / countries that do this.

But short dollar is just another widow-maker trade. May well be a winning one... some day.

In March 2009 the conventional wisdom was that China had the size to pull it off - trip the cascade against the dollar. With QE that situation has changed and the conventional wisdom might always have been wrong.

garypaul's picture

"If interest rates rise here, dollars will flood back home, driving rates down, the currency up, wreaking havoc on Asian markets... seen this play before."

Sorry but could you explain how a strengthening USD would be bad for Asian markets??

lewy14's picture

Sure - much of their bubbalicious frothiness is driven by investors in the dollar world - they want to invest where there's growth, so they buy assets of emerging economies - and short (sell) dollars to buy those assets (in local currency). Then when there's a crisis, or "risk free" dollar assets are on sale, or liquidity evaporates, they get out of Dodge, and come roaring back into the US - dollar strengthens.

We saw this during the "taper tantrum" in July. Foreign markets sold off heavily as the 10 year rate climbed to 3%.

A full-retard dump from the PBoC and SAFE would probably drive the rate much higher than that - but _then_ what would happen? The resulting economic slowdown would give the Fed perfect excuse to just buy moar. 

When the Fed had $800B of liquidity in the system I would have believed that monetizing $1T of "dumped" Treasuries would have been fatal to the US. But now you're expecting me to believe that the jump from $4T to $5T will be fatal? C'mon! 

NihilistZero's picture

Two superb posts!  Plus ones my friend

czardas's picture

Very true.  If the Chinese wanted maximum affect they would have continued merrily buying dollars then stopped.  Instead they allowed the Fed to become the major (only?) buyer and though ZHers hate it, that is now the new reality - Monetizing USA.  I can easily foresee a dump and within an hour the Fed calmly stating it is buying everything the Chinese are dumping - No Problemo.  For that matter I can easily see NPR making light of a $25T debt as "not important in the long run".

runningman18's picture

Your pie-in-the-sky theory doesn't make sense.  China created all that liquidity in the Yuan exactly so they could break from the dollar as a world reserve, and they'll certainly have more friends than we will if the U.S. defaults on its debts or continues to print unchecked (which are the only two options anyway).  If anything, the situation is worse than it was in 2009.  The value of any dollar denominated assets they still hold during a devaluation event would be offset by their considerable gold purchases.  There is absolutely nothing stopping the Chinese from dropping the dollar.  In fact, they'e already started the process by cutting new dollar purchases and removing the dollar in bilateral trade with other countries.  It's amazing how people still cling to the delusion that China needs the U.S. to survive economically.  That idea hasn't been valid for the past five years at least.    

lewy14's picture

Your pie-in-the-sky theory doesn't make sense. 

Possibly wrong, but not altogether inconsistent either in its internal logic or with recent experience.

China created all that liquidity in the Yuan exactly so they could break from the dollar as a world reserve,

They had to create yuan internally when they bought all those USD denominated assets. That was how the whole currency suppression / capital investment driven economic policy worked. It's also an accounting identity on the PBoC balance sheet. As to the external "yuan liquidity" that is indeed increasing fast, but from a low base. The capital account of the country remains more or less closed. It will open and the yuan's role will increase - gradually.

This is a far cry from being effective as an weapon of war to create sudden instability, which is the topic of this post.

and they'll certainly have more friends than we will if the U.S. defaults on its debts or continues to print unchecked (which are the only two options anyway). 

Explicit default is unlikely. Continued printing inevitable. Where's the cliff? Damned if I know, but assuming that it's the next trillion after four doesn't strike me as particularly compelling.

If anything, the situation is worse than it was in 2009.  The value of any dollar denominated assets they still hold during a devaluation event would be offset by their considerable gold purchases. 

You are assuming that sudden dollar devaluation can be caused - I don't think it can. Not next year anyway. Gold is a fine asset - but any asset that they buy will be bought just as hard as any asset they sell. The Chinese may find their liquidation of UST shockingly orderly. Then they'll be sitting on USD Fed funds reserves. Go ahead PBoC, spend it suddenly. Everything they bid will just go up hard - gold included. Of course they could leave all the USD ones and zeros on deposit at the Fed. How exactly is that a weapon of war?

There is absolutely nothing stopping the Chinese from dropping the dollar.  In fact, they'e already started the process by cutting new dollar purchases and removing the dollar in bilateral trade with other countries. 

Agreed. And it's a fine move and widely telegraphed and anticipated. Andy Xie says maybe 5/10 years. Michael Pettis is more skeptical and sees issues. Damned if I know but I figure that they'll make it work, probably gradually. Dollar will probably break 50% of global trade settlement within a decade. Still leaves the other 50% to displace.

It's amazing how people still cling to the delusion that China needs the U.S. to survive economically.  That idea hasn't been valid for the past five years at least.    

Again, you're conflating two things:

- that China needs the US to survive economically (it remains somewhat entangled, but is working hard to untangle - power to them),

- that China has an effective weapon of war which could destabilize the dollar (and hence the whole global economy, thank you, because if USD goes down in 2014 the collateral damage (heh) will be huge.) I'm looking for the rational that China has such a thing and I don't see it the way I did five years ago. I suspect that QE could have been motivated by precisely just such a result: a way to "defuse" the financial WMD that their Treasury holdings were thought to represent.

Ten years from now the dollar could be trading a lot lower, Shanghai could be the new London, the yuan might be fully convertible and rich Americans could move en mass to holding yuan-denominated accounts in Singapore and HK. But China will have to change for that to happen - dollars remain attractive because America fundamentally remains for sale, and China does not. 

You can't make fiat currency dominate by fiat: you have to turn out your whole nation to do it, and offer stuff that the rest of the world feels comfortable owning*. Given how shockingly large a percentage of total wealth is represented by real estate, the US is always going to have some structural floor on their currency because of it.

So when China fulfills its agenda, it still won't have a financial weapon of war to use against us. It's the sudden moves that kill. 

*[Japanese real estate was bid to the moon - by the Japanese. And crashed. Turns out non-Japanese don't feel exactly welcome in the fabulous resort towns outside Tokyo. Davos and Aspen remain more popular than Mishima. Go figure! China will be the same.]


Agent700's picture

You have a very informed perspective, let me query about a few things.

Yes, the quantity of RMB has increased because of USA trade and the need to manage the Yuan peg. Credit has exploded since the GFC and Beijing's stimulus response, not to mention the shadow banking system here, which because of their closed capital account has created an enormous debt/property bubble inside their borders. When that resets, as it must, the fact that so many Chinese have invested their life savings in real estate will cause unrest for Beijing. I think they realize all of this......

The Chinese and others have been quite clear about their desire to "de-Amercanize", especially now that they have an increasing number of trading partners, currency swaps, energy agreements and (quiet) military agreements (think Russia) and a burgeoning consumer class. There are some power players on the globe who resent the contol the petrodollar has over their economies and geopolitical "freedom", including new subscribers Saudi Arabia and Israel.

All of your thesis rests upon the USD remaining the reserve currency or gradually being phased out. So what if all these players decide to replace it quickly? With the CNY as a base currency? What if Beijing opens up it's capital account and makes the RMB fully convertible at the same time and backs it by gold and the other participating nations economies/currencies? What if they invite foreign investment into their banking systems and create a domestic bond market, in the new currency, overnight?

Yes, the flows in and out would be extremely volatile and disruptive, not only to China but to the global economy, but the playing field would be reset and the chips would fall where they would fall. Beijing would have to accept the outcome, whatever it may be, but in the end they might lead the way to a new monetary system and gain power becasue of that......Catching the USD flat-footed but not destroyed, and perhaps avoiding a shooting war since a large part of the globe would be in on the deal.

What about something like that?

lewy14's picture

All of your thesis rests upon the USD remaining the reserve currency or gradually being phased out. 


What if Beijing opens up it's capital account and makes the RMB fully convertible at the same time and backs it by gold and the other participating nations economies/currencies?

Then they risk a run on that convertability to test their credibility. "Backed by gold?" You mean pegged, right? Because I can buy gold with dollars at market rate, so in that sense it's "backed by gold". Pegging is bloody risky. 

What if they invite foreign investment into their banking systems and create a domestic bond market, in the new currency, overnight?

Beyonce had her hands full trying to get her album released "overnight" without leaks. You're saying Beijing could do the same with a new reserve currency? Without the NSA catching wind? I'm sure the NSA knew Beyonce had a new album. Fortunately for her, even they have scruples. With China, not so much. That kind of stuff is what the NSA is for.

You know I wouldn't be surprised if there was a PowerPoint deck or two circulating around the Chinese leadership regarding such a plan. BUt China isn't led by an evil genius or a risk taking maveric. It's led by a freakin' committee. So good luck to whoever's pushing that "ditch the dollar overnight" plan.

And again, see above - for the Chinese to be able to open their capital account, they have to have stuff people want to buy. Foreign investors in Japan are famous for being "tourists". I suspect China would be similar. Credibility is not established overnight (and it is not lost overnight, though the US has been flat out dumping its credibility for a while now).

I want to stress - I'm not claiming I have super insight or that I know I'm right and others are wrong.

I'm simply challenging the conventional wisdom with regard to the Chinese financial "weapon". I can't talk myself into worrying about it too much - gaming out the actual costs and risks, it seems less likely to me.

That said, a sea change, disorderly and "way ahead of schedule", rolling out over 9 to 18 months or so, with a spontaneous cascade of defectors - now that should worry Washington.

If this happens it will likely be because it was nobodies specific intent, rather than somebodies devious plan.

lewy14's picture

Care to explain what you mean? What does "backed" mean if there is no peg? It's not knee jerk, it's conventional understanding. The USD was backed by gold and by backed the US meant pegged. Till Nixon ended that.

China can say "We have a metric crap ton of gold. Let's do business in yuan." Ok. That's nice. Where do I convert my yuan to gold? At the coin dealer, just like I do now? So what?

One of us is actually trying to test assumptions here. Doesn't seem to be you.

lewy14's picture

So you're assuming the price of gold will fall in yuan? So it'll be cheaper tomorrow?

OK... but if the Chinese continue to buy gold, how will that lower the price? 

I can see if the Chinese sell dollars against gold, it will raise the price of gold in dollars...

Which won't bother me, got my gold already, thanks... 

But what will it do to the price of gold in yuan? It can't fall against the yuan without also causing the yuan to appreciate against the dollar. And it's not stock (the net value of Chinese investment in USD assets) but flow (exports to the US - the necessary cashflows to pay the interest on yuan debt owed by Chinese corporates) which will limit policies which strengthen the yuan vs the dollar.

No, still not getting it. Just thick, I suppose. 

Bendromeda Strain's picture

Dude, why the hostility - go back to his original post and see that the thought process started with the assessment that

This is almost conventional wisdom now. I find the logic compelling.

Here's how it could be wrong.

Did you catch the "could be" part? Even if I disagreed with him, there isn't any stridency there to be attacked. Chill


/fight club


czardas's picture

So what if all these players decide to replace it quickly?    But this is exactly will not happen for one reason:  the incredible amount of effort and time required to set up the mechanisms whereby the dollar is the default unit cannot be replicated "quickly".  Even those states who have announced they will "bypass the dollar" are STILL valuing their currencies in dollars for exchange rates - LOL   (The yuan is converted to dollars then into currency X)  And anyone who has traveled the globe will attest that the demand for yuans is less than zero.

dracos_ghost's picture

We have to keep in mind that the IMF has the SDR concept sitting on the bench so the time and effort part you mention might already be moot. An IMF/Yuan friendly agreement with respect to the SDR would most definitely kill the US overnight. That would provide cover for China to distribute their risk through the IMF as well as take advantage of the existing account settlements network. The US would be cornered into a war scenario.

On the flip side, the US could pull a Volcker as others have said and crank rates up to 18%. The dollar blowback would absolutely crush China and promote other entities in the region(Viet Nam,etc) since China would no longer be lowest cost provider. We're already seeing that theme play out. China would be cornered into a war scenario.

I think we may be looking at the wrong black swan here. What about China going to war with China. The provences aren't real happy with Beijing and social unrest is festering. You know the West doesn't have a monopoly on inept and clueless politicians contrary to Chinese State Run Media reports.



lewy14's picture

On the one hand, an IMF inclusion of the yuan in the SDR would have all the problems that general yuan convertibility would face - there would have to be some external demand for yuan - and the IMF is still largely run by the West - other powers that would suffer greatly in a general dollar demise.

On the other hand, the US has no capacity to "pull a Volker" - not without crushing its own economy. Short rates in excess of a few percent would BK every entity in the US from the local food cart to the Federal Government. We've long since lost our tolerance for that kind of medicine - too much leverage.

Ironically it was the soul-killing inflation of the 70's which made Volker's medicine tolerable - the _real_ rate wasn't totally insane, and the overall debt levels had been paid down thanks to a decade of high inflation. That inflation contained elements of "good" inflation - higher incomes (remember the "wage price spiral?" Now it's just the "price-price escalator").

[Edit - my point being that while I think that China's ability to attack the dollar is overrated, I don't see that the US has much room to defend the dollar anymore, either.]