Uh Oh, We're Fucked....

(hat tip to Mr Doggity, who is a welcome addition to Blogtopia (© Skippy The Bush Kangaroo)

You might want to pass this story around amongst friends, then start making survivalist plans. This could get rough:

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

To get an idea of the magnitude of this, the US debt outstanding is just under $10 trillion, so about ten percent of our debt is in China's hands, the second or third largest creditor we have, after the UK and possibly Saudi Arabia.

It's curious that China would make these comments on the heels of their recent export tragedies, but China's never really been beholden to Western sensitivities.

Congress has announced they would be looking into imposing more tariffs on Chinese made merchandise, partly in response to trade protectionist forces within the Democratic party, partly as a sop to those who have accused China of currency manipulations (thus covering both labor and management, and making a political stand on China ahead of the 2008 elections).

China's yuan is pegged to the dollar at a fixed rate so the first real warning shot would come when China loosens those ties. It has allowed the yuan to float to a higher level in recent months, and yes, has made what appear to be manipulative moves with their currency trades, but has not completely freed the yuan from the dollar.

Such a move would force the yuan to rise against the dollar and force Chinese officials to sell dollars to cover losses. The dollar would then drop precipitously and, well, forget about getting loans for a while as the credit markets tighten to absorb the new US demands for credit to repay China.

What? You thought we'd grow our way out of this mess?