Tuesday, November 12, 2013

Did China Threaten the U.S. Over the Debt Ceiling Debate?

Fukushima Unit #4 Spent Fuel Pool - ALLOW IMAGES

What You Need To Know

Originally published at threatjournal.com
In a piece appearing late last week in the online journal of Armstrong Economics, Glen Downs, Chief of Staff for Congressman Walter Jones of N. Carolina, shared an interesting insight on what happened behind the scenes that brought the heated debt ceiling negotiations to a sudden end.

According to Downs, "Credible sources here in Washington have shared a chilling back-story that took place involving the President and congressional leaders of both parties as the clock ticked down to the Treasury running out of cash earlier last month. It seems that more than one creditor nation, led by the Chinese, indirectly telegraphed a willingness to take very draconian measures in response to a ‘debt default’ – apparently even if coupon payments were made on outstanding debt owed to them. Those measures were set to go way beyond being financial, and were said to be credible in nature. At least one senior Republican scoffed at the threat, but relented when briefed by (at least nominally) non-political figures in the national security community."

AlertsUSA Threat Journal makes mention of this piece in light of last week's highly unusual move by the Chinese to publish in multiple mainstream media outlets their nuclear war plans against the U.S., including land-based and submarine-launched missile strikes on U.S. cities that would kill up to 12 million people.

We add to this the well publicized, steadfast refusal of the White House, State Department and DoD to even comment on the Chinese threat.

While AlertsUSA Threat Journal has no definitive proof of connections between the debt ceiling negotiation threats and the Chinese publishing nuclear strike plans, not to mention other recent unusual disclosures of their growing military capability, it would be foolish to dismiss them as unrelated.

In calls placed by AlertsUSA to sources on Capital Hill who are in the know but refuse to speak publicly on the matter, the response was the same: "I can neither confirm or deny a connection between the threats, though it would not be off the mark to draw this conclusion."

China is currently the largest foreign holder of U.S. debt instruments valued at 1.3 TRILLION. The total could actually be significantly higher as Beijing is also known to hold American debt through intermediaries. Combined, the total U.S. debt held by the Chinese are estimated to be somewhere in the range of $3.5 TRILLION.

With this level of money in play, China clearly appears to have no intention of being played like a chump by the White House and Congress.

Approximately 60% of all global trade is conducted in U.S. dollars. Thus, exporting nations such as China accumulate huge reserves of the currency. Instead of just letting the money sit idle, most countries purchase U.S. Treasuries. And herein is the problem.

Fiscal dysfunction in Washington puts Chinese officials, and the country's economy, in a very difficult position. A default or debt crisis in the U.S. would substantially reduce the value of China's U.S. Treasury holdings, as well asopen the party leadership up to big trouble with the populace for investing so much of the country's wealth in the U.S..

Does China "need" America? For the moment, yes. There are few other viable alternatives to U.S. Treasuries for China to park it's enormous reserves and the market for Chinese goods is still very good, though things are changing fast. China has been making great headway in transitioning their economy towards more domestic demand, as well as expanding trade opportunities with other nations.

Further, China and many other large economies are transitioning away from the U.S. dollar in matters of trade. Australia and China now trade directly using their own currencies, completely sidestepping the USD. The same goes for China and Brazil. And just last month, Europe and China agreed a currency swap deal to boost trade and investment between the regions, here again completely sidestepping the USD.

Repayment of at least a portion of China's holdings of U.S. debt is going to happen, either directly or "in-kind" through the transfer or acquisition of strategic technologies and assets (defense technologies, key industrial concerns, gold, etc.). But at some point in the not-so-distant future, the U.S. house of debt will come crashing down. Between now and then, it is expected that China will be exerting as much pressure as possible, perhaps even including threats, to keep their existing holdings safe.