China is today one of the largest holders of U.S. foreign debt, and if Beijing seriously embarks on a liquidation of the American currency, the dollar will lose its previously untouchable position in the international reserves market.
Written by: Goran Feuerbach
When last week Marko Kranjec, the governor of the Central Bank of Slovenia, tried to warn European central bankers that they should take a more serious stance towards the possible transatlantic spillover of the crisis affecting the U.S. secondary mortgage market, his warning was reported by almost all serious financial media, but the professionals he usually collaborates with earned sharp reprimands for alleged reckless babbling and disturbing the investor community. When the United States received a sharp warning from Beijing a week prior that it would be better to abandon the announced trade sanctions against China if they did not want the Chinese government to start liquidating its vast dollar reserves, this warning was met with arrogant skepticism, typical when former colonies address the wealthy West. The Americans, it seems, have forgotten a bit and overlooked that they once shared common colonial masters with China. What they could not afford to overlook, however, is the bitter truth that China is today one of the largest holders of their foreign debt and that if Beijing seriously embarks on a liquidation of dollars, the American currency will lose its previously untouchable position in the international reserves market.
Blackmail and Reconciliation
Although one can never know with the Chinese, it is most likely that they will not take such revolutionary steps. At the very least, according to financial analysts, they know well that most of their exports go precisely to the U.S. If American consumers become impoverished, or even momentarily fear that they might become impoverished, this will leave Chinese exporters without a lion’s share of revenue, Wall Street is consoled these days. U.S. President George Bush, who, after ‘suing’ China at the World Trade Organization (WTO) for currency dumping, announced sanctions, continues to assert that he ‘will not yield to any Chinese blackmail.’ However, it is quite clear that both sides are more than ready for conciliatory negotiations from which no one will leave without promising the other unimaginable concessions today. Many analysts today believe that a trade war with the Chinese would suit Bush more than well at a time when the nation’s eyes are focused on the financial policy of his cabinet, expecting a solution that will save over-indebted buyers of overpriced real estate from the clutches of cruel bankers always ready for foreclosure. However, it seems that the Chinese threat of dollar liquidation is currently too strong a weapon.
Crisis Hotspot
In short, Slovenian governor Marko Kranjec was right. However, today some question whether it is actually the Slovenian, as the smallest, politically easiest, and in any case the youngest member of the ECB’s Governing Council, who has been imposed the role of bearer of a sinister message. Even if the answer to that question is positive, the fact is that the eurozone has been hit by a crisis whose end, despite numerous comforting statements, no one can actually predict. The U.S. secondary mortgage market has been considered a potential crisis hotspot by cautious analysts since its inception. It is, in fact, a credit market intended for those who otherwise cannot obtain credit – people with low wages or even without one, as well as, according to many, a more dangerous sort, those who have already been marked as bad debtors in the past (the recent launch of the Croatian Credit Obligations Register gives spending-prone Croats the opportunity to find themselves among this second sort, only that in our case, secondary credit can currently only be obtained from loan sharks). High interest rates are intended for bad and risky debtors, and such interest rates bring high profits to company owners willing to engage in this risky business. However, when things start to go downhill, the real victims will not be the bad debtors, but the owners of credit companies, mainly large investment funds.
