Frying Pan, Meet Fire
James Rickards knows about financial collapses. He was general counsel for the massive hedge fund Long Term Capital when it imploded in the 1990s. That event came close to bringing on the kind of meltdown we’re seeing today. And, in a Politico piece from yesterday, he says conditions are ripe for a much, much larger economic earthquake; one that would make our recent troubles look like a minor temblor by comparison.
Several of his doomsday scenarios should sound quite familiar to Captive American readers. For instance, there’s that whole China problem that we talk about a fair amount around here. You know, the small matter of how our political leaders have essentially handed over our economic security to an authoritarian communist country that could easily be considered our biggest adversary in the world?
Yeah, that one.
The Chinese own more than $500 billion worth of U.S. Treasury bonds, and billions more in the debt of other U.S. entities such as those held by Freddie Mac and Fannie Mae.
The author of the piece, as is typical of the avowedly establishment Politico, takes greats pains to downplay the horrible reality that our country faces. He reassures readers that the Chinese would be crazy–simply crazy!–to “wield that debt like a weapon.” After all, if they sold off their holdings and wrecked our economy, they’d suffer as well. But, really, how soundly should we all sleep at night knowing that our financial well being as a nation depends on the prudence of a bunch of Communist Party despots in Beijing?
Sure, there is a kind of mutually assured destruction at work here, but unlike the situation during the Cold War, our enemy is the only one with a finger on the button! We have absolutely no leverage over them. And as we pass bailout after bailout and print up trillion after trillion in new debt, we just make them even more powerful.
Even if we assume the Chinese won’t launch a devastating financial first strike against us, they’re already in the cat bird seat when it comes to influencing our policy, says Rickards:
“[Our indebtedness to them] gives the Chinese de facto veto power over certain U.S. interest rate and exchange rate decisions,” Rickards explained. “For example, there’s a limit to how much dollar depreciation the Chinese would tolerate.”
That potentially closes off one American economic strategy: allowing the dollar to decline in value in order to help boost U.S. exporters. And China’s leverage is only growing as each federal bailout adds to the U.S. deficit.
And China isn’t necessarily the only player who could use our massive indebtedness against us. There’s a whole world of restless Treasury bond holders out there who could dump our I.O.U.s on the open market and turn us into … well … the beggars we already are:
“The Number One vulnerability is the dollar itself,” Rickards concluded. “We’re printing them and shoving them out the door, and the Fed is basically out of bullets. So why hasn’t the dollar collapsed? The short answer is, global investors don’t have any other choice …
But what if some kind of global coalition - say a trillion-dollar sovereign wealth fund allied with several countries around the world - banded together to create a gold-backed alternative to the dollar?
Rickards says investors - many of whom already resent that they have no alternative to the dollar - would sell American currency in huge numbers to take advantage of the new opportunity. “If that happens, that’s the end of the dollar,” Rickards said.
So we’re not just utterly dependent on the good will, or at least good sense, of party bosses in China. We’re also vulnerable to the capricious, and ruthless, habits of global currency speculators. Yikes!
But never fear! The Politico author tries to soothe our nerves by topping off his stomach churning article with a dripping spoonful of inside-the-beltway snake oil:
Still, even Rickards sees a silver lining to all this. He looks around the world to the problems facing other countries such as Russia, China, Iran, and those in the Middle East.
“There are vulnerabilities for the United States, but also opportunities,” he said. “I’d rather be the United States than any of these other countries.”
So, despite the outright negligence of our political leaders and the massive problems we face as a result, we’re still somewhat better off than countries like Russia or Iran? Gee. How comforting.
Comments
We invite civil and constructive comments about the writings on this web site.