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Comment by dsplittgerber | Hacker News Reader

Their government wealth fund holds one of the largest USD reserves in the world, if not the largest. Theoretically, they could threaten to quickly unload it and send the USD tumbling if they don't get their way with some policy. Realistically, that won't happen, as the yuan is still pegged to the USD and the US is one of the largest importers of chinese stuff. It's not that far-fetched to think of some other worrying scenarios, though.

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Pulling it out would be M.A.D., it effectively won't happen. And given that the rest of the world would pretty much tumble with it, there'd be a mad scramble to protect the USA from bankrupting, and a mad attack on China for doing so. As evidence, just look how USA's economic downturns are reflected by others shortly after.

They are likely to try to use the debt to pressure the USA though, which is still a fairly real threat. If they're not already, that is, I wouldn't be surprised (and it wouldn't be illogical for them to do so, it is in their best interest to have as much control as they can get).

Worrying about this was one of the primary reasons for creating the U.S.-China Strategic and Economic Dialogue, so these topics are being adressed at the highest levels of both governments.

Yeah, I think China would avoid doing anything that looked like an outright hostile act, like dumping all its reserves simultaneously. If they did so, and the U.S. considers it a hostile act rather than merely commercial maneuvering, there are a pretty wide range of options to retaliate, which makes it something of a M.A.D. scenario. Among other things, the U.S. could void the $1t of outstanding Treasury bonds held by China, seize the assets of Chinese companies in the US, and/or ban imports from China. I think both countries would fare pretty poorly from an all-out economic/trade war, even if it didn't spill over into actual hostilities (there are edge scenarios where you can imagine e.g. an angry U.S. recognizing Taiwan's independence in retaliation).

As Peter Schiff has noted, if US dollar tumbles, holders of the dollar will be hurt, but the US itself will be wiped out. The situation is analogous to a stock market bubble. Holders of stocks with inflated values are hurt when the stocks lose their value, but the over-valued companies themselves go bankrupt.

Furthermore, China would be better off if it consumed more of what it produces rather than sell it to Americans for American dollars and government bonds.

When stocks tumble the companies usually keep operating along, the shareholders take the big haircut.

Except when the company is cashflow negative and needs to continue issuing debt to operate. Once confidence in them is shot, and they can't find money to borrow, they file for bankruptcy. See the parallel?

I wish you had just replaced Peter Schiff with, "Ron Paul's economic advisor" to save me some time.

What you assert is simply untrue. It would be a good thing, currently, for the dollar to be devalued somewhat. Our exports would be cheaper to others and thus more attractive.

Please cite credible people when you attempt to make extraordinary claims like 'the US itself will be wiped out'.

Look up "peter schiff was right" and "peter schiff mortgage bankers speech" on youtube. At the time when "credible" people were predicting no recession and prosperity in perpetuity, Schiff was a contrarian voice predicting recession and a fall in housing prices. For example: see http://video.google.com/videoplay?docid=7879752717244782545# which shows side-by-side prognoses from Schiff and bullish pundits on CNBC and Fox News before the recession.

You can't get to prosperity by devaluing your currency because prosperity depends on savings and investment and a falling currency encourages the opposite.

Alright, here's a problem for you, no one will assert that bullish pundits on CNBC are credible.

http://www.cepr.net/index.php/dean-baker/

Dean Baker is an actual economist and he called the housing bubble.

I find your last sentence bizarre as it asserts as a truism something that is not really true at all. You believe people who are on the on the fringe of economics and seem to enjoy it so more power to you.

Your comment reeks of appeal to authority. You should at least demonstrate why "bullish" pundits are wrong.

It doesn't matter if an economist is on the fringe of economics, especially a field that is notorious for not being able to predict much of anything.

It matters if they are right, or wrong, how much, or it is just plain storytelling(and wrong!) in addition to lucky predictions.

It does and I'm not above making that move with certain positions. If you don't have a problem with bullish pundits then I wonder where you were in the late 90s. Regardless, predicting the future is a bit of a silly exercise and not many people come away from in being right.

Appeal to authority is the way to stay sane against crazy ideological camps: Ron Paulites, 911 truthers, creationists, etc. I am not going to take the time to rebut all the nonsense they manufacture. It is important to point out where these people are coming from.

Appeal to authority is the way to stay sane against crazy ideological camps: Ron Paulites, 911 truthers, creationists, etc

As if libertarians are some crazy right-wing nutcases who wants drugs, believe in every single conspiracy theory about the government, and as well think free markets can perform miracles.

Yes, there are probably tons of crazy and wrong ideas out there, ranging from anarcho-commiunism, labor theory of values, and the paradox of thrift.

But, there are also ideas out that are right or just worth exploring. Black Swan theory, the problem of economic calculation, the broken window fallacy, etc, are examples.

This is not physics or biology where everyone agree with each other and they'll be right 99.99% of the time(except the cutting edge of their field). We're discussing economics here, where politics intervenes, the subject matters difficult to study, and whole mathematical models can be invalidated because humans are positive feedback loops. You can't make shorthand judgement in that field.(With the exception of free trades. Every economists say it is a good thing and they'll be right)

And where I was in the 90s? I was in elementary school.

This is really sad. Did you see libertarian in there? Ron Paul is not the only libertarian and is despised by many libertarians. I'll go into that further if you so desire.

>Black Swan theory, the problem of economic calculation, the broken window fallacy, etc, are examples.

These have nothing to do with what I was talking about. I'm quite familiar will some of these topics and they are interesting to consider.

As I said before I'm down with econ not being a precise science. However, some opinions just aren't that serious.

Oh please, Peter Schiff has been trumpeting the fall of the US economy since 1999 at least. If you cry wolf enough times eventually there's actually going to be a wolf.

Schiff was a contrarian voice That's at least correct. Schiff is part of the same anti-regulation crusade that got discredited two years ago.

Schiff is part of the same anti-regulation crusade that got discredited two years ago.

And you expect me to believe this when the federal reserve exists?

It's not #1. That's Japan.

edit: the source: http://www.cnn.com/2010/BUSINESS/02/16/china.us.treasuries/i...

Not true, it's China. "China’s foreign-exchange reserves now total $2.4 trillion, of which about 70% are thought to be in dollars." http://www.economist.com/business-finance/economics-focus/di... http://en.wikipedia.org/wiki/List_of_countries_by_foreign_ex...

Edit: Downvoting, seriously? If China has 2.4 trillion foreign currency reserves, 50-70% of which are USD, and Japan has 1.0 trillion foreign currency reserves totally, how can Japan ever be ahead of China?

2nd Edit: http://www.treas.gov/tic/mfh.txt Seems like CNN/FT.com had it wrong?

forex reserves != US public debt

although China is #1 holder of both, US public debt held by China is 24.3% of total foreign ownership (Japan #2 @ 20%)

You are right of course, which is why I talked about USD reserves, not debt. Speaking about debt, China also holds ~400 billion of Fannie/Freddie bonds, which is not included in the official figure, neither for debt calculation, nor for foreign ownership, I guess.

Yes, it is in fact far fetched. They are powerless to do anything about their dollar reserves without losing substantial amounts of wealth.

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