Thursday, January 20, 2011

Does America's No. 1 creditor, China, hold the ultimate weapon? Would they use it?

China's Debt Bomb
'He who pays the piper calls the tune": That old saying captures perfectly America's growing dependence on our No. 1 creditor in the world, Communist China.

By their carelessness Congress and the Obama administration are steadily handing over control of America's economic and financial future to a handful of Chinese officials and generals in Beijing. Those who think the Chinese won't use that control if they feel they have to are ignoring history -- and the Chinese.

The ancient military strategist Sun Tzu said that the best strategy was to render an opponent's army helpless even before the battle began. America may still have the biggest and best military in the world.

But many at the Pentagon are starting to realize that, thanks to our growing fiscal irresponsibility, we may be surrendering control of America's destiny to a rival superpower -- and all without a shot being fired.


History shows that nations that can't control their economic fortunes don't control much else. Debt freezes destinies -- as every credit-card holder knows.

Europeans discovered that after World War II, when they lost the power to make major decisions without first checking with their lender-in-chief, the United States. At that time, we used our economic dominance to rebuild Europe, not reduce it to impotence.

On the other hand, If US-China relations continue to deteriorate -- over arms sales to Taiwan, Internet freedom issues, Chinese industrial espionage and a Chinese military build-up that looks more and more like it's directed at challenging US power in Asia -- our lenders-in-chief in Beijing may not be so scrupulous.

Indeed, back in 1999, the Chinese literally wrote the book on how to use economic asymmetries as a blunt instrument, entitled "Unrestricted Warfare."

It draws no meaningful distinction between military, economic and political force (including using cyberspace) as means to defeat an enemy. Instead, it shows how a nation can dominate its opponents not with planes, ships and soldiers, but with foreign exchange rates, trade embargoes and armies of computer hackers.

Suppose that in retaliation for some slight China decides to stop buying Treasury bonds, forcing our debt to cost us even more. A furious US Congress hits back with trade sanctions. China then responds by driving up the price of the dollar, crippling US exports -- or, alternately, it crashes the dollar by dumping its foreign reserves, even as Chinese computer hackers slow down our banks' ability to respond to the crisis.

No one will call this a war. But it will certainly fit the classic definition of war as politics by other means. And the Pentagon knows it.

Last March, the Pentagon held its first-ever economic-warfare war game, with China as the putative opponent and with economists and bankers (including from UBS) helping out.

Details of what unfolded are still classified. However, sources told Fox Business News that the scenario played out as planned. That was the good news.

The bad news is that China won. [...]

So what's it all mean? Read the whole thing, and connect the dots.

And yes, it also mentions reasons why China would be reluctant to do many of these things. The question is, what changes in circumstances would make them less reluctant?

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