(snip)"China has amassed a stockpile of U.S. dollars and Treasury bills for both short-term and long-term reasons. In the short-term, it keeps their exports cheap and increases their trade surplus, fueling their manufacturing base and helping them to also control and even to some extent intimidate financial markets in the U.S. It is in the long-term, however, where the real danger lies.
Now that China is diversifying their currency holdings into euros and other currencies, they can do significant damage to both the U.S. and Japan's economies. By dumping their dollars and Treasury bills, they can send the value of the dollar spiraling downward and seriously weaken confidence in Treasury bills and perhaps spur a dumping of those bills by other nations such as Japan and Saudi Arabia. Interest rates will shoot skyward, property values will soar, inflation will take hold, and the U.S. economy will screech to a halt, already stumbling along due to unemployment and low manufacturing statistics and high energy prices (not to mention a ballooning deficit and the war in Iraq). As goes the U.S. economy, so to goes Japan's financial markets. The combination of a bad economic downturn in the U.S. and Japan, coupled with China using all the amassed U.S. currency to purchase euros and send that currency skyrocketing, and finally added to Iran's already seriously strained relations with the U.S., could all tempt a handful of OPEC nations -- Iran and Venezuela, perhaps more -- to dump petro-dollars for euros. That could possibly be the straw that breaks the camel's back, and the U.S. might actually fall into a full-blown depression.
China, meanwhile, would see the value of their large currency reserves increase substantially in value as the euro rose even more in value once some OPEC states made the currency switch. By tying their own currency (the yuan) closer to the euro and away from dollars, China is ensuring that they are not in as much danger of losing their role as manufacturer of cheap imports. Even though a weakened dollar and U.S. economy would mean a serious decrease in imports from China, the increased imports into Europe due to the strength of the euro against the yuan could make up the difference -- and Europe has a population roughly 50-percent larger than the U.S. Any short-term negative impact against the yuan and Chinese exports would be negligible and not very long-lived, and the long-term gains would be potentially enormous. And in the context of peak oil, this part of China's strategy may be a gamble they have no choice but to take. For China to make a move against Siberia and secure the oil reserves they will need, the U.S. must be weakened and unable to respond either economically or militarily. The damage China could do using this scenario could achieve that result."(snip)



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