Our Economic Vulnerability

by Kevin D. Freeman on June 15, 2011

Barely a day goes by without further evidence in open sources regarding the huge economic vulnerability we have. Here are a few recent examples:

1)  From Real News Real Fast

Financial Warfare: Why Our Enemies Would WANT To Buy Our Debt

            Date: Jun 06 2011 8:13 AM   written by Blaise Ingoglia

For the better part of the last eight years I have been telling everyone that would listen that the biggest national security threat we face is not from a nation that supports terrorism, but from our national debt. If you are one of the thousands of people who have seen our live seminars you have witnessed first hand how I spend a lot of time on this subject and what we call “financial warfare” and how it threatens the sovereignty of this nation.

In the live Government Gone Wild seminars I use the example of the Suez Canal Crises of 1956 where allies of the United States (Great Britain and France) were in a battle with Egypt over control of the canal. At that time the U.S. owned a great portion of Great Britain’s debt and we were able to put financial pressure on them by threatening to dump their debt and sell sterling on the open market and thus destroy their currency as to cause a shortage of reserves needed to pay for imports. Great Britain and France backed down and some historians have said that it is at this point in time where the great British Empire ceased to exist.

This past week I had the opportunity to see the HBO movie “Too Big To Fail” which is a film based on the book about the banking crises written by Andrew Ross Sorkin who is a columnist for the New York Times. There is a part in the movie that most glazed over…but shook me to my core and, if true, really captures the magnitude of our debt problem.

In this particular scene Hank Paulson (played by William Hurt) is sitting down having dinner with who appears to be the Chinese Minister of Finance. He is then told by this Chinese official that the Russians had contacted them and asked them to coordinate the dumping of hundreds of billions worth bonds on the market. This modern day version of financial warfare would have, according to Hank Paulson and Ben Bernanke in the movie, brought down the entire economy of the United States!

Thank God the Chinese said “no thank you”.

The sad state of affairs is that our nation is now open to this type of financial attack because our reckless spenders in D.C. wont stop spending. Congress has put us in the unenviable position where our enemies abroad would want to buy our debt because it offers them a greater chance of bringing down this nation. Our record deficits represents an opportunity for the enemies of liberty to have incredible leverage over us: the chance to be our banker!

China has this leverage over us now but they choose not to dump the debt because currently we are their best customers. We may not be as fortunate in the future.

2)  CNBC: Dollar Index at 1-Month Low as China Warns on US Assets

        | 07 Jun 2011 | 06:15 AM ET

The dollar fell to a one-month low against a basket of currencies on Tuesday and a record low against the Swiss franc after a Chinese official said the greenback would continue to weaken versus other major currencies.

The head of the international payment department at the Chinese forex regulator also warned about the risks of excessive holdings of U.S. dollars.

“China has been growing its share of U.S. securities quite aggressively in the past, and the threat that they will be selling these holdings has always been there,” said Adam Myers, senior forex strategist at Credit Agricole.

3) CNS News:  China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

Friday, June 03, 2011 By Terence P. Jeffrey

(CNSNews.com) – China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.

Each of these articles highlights the vulnerabilities we face as a nation. Each has a slightly different message. The first demonstrates the very weak position we are in, having to sell our debt to foreigners. The second shows Chinese awareness of the leverage this gives them as well as their public pronouncements that they can and will sell the debt as suits them. The third shows a dramatic, real world example of how they can quickly dump their U.S. holdings. In this case, the Chinese let go of only very short-term securities at a time in which the global appetite for Treasury bills was quite strong. Nevertheless, this action proves that they can adjust their U.S. holdings rather quickly if desired.

To put this in context, consider this from the Chinese Communist Party publication Qiushi:

“Of course, to fight the US, we have to come up with key weapons. What is the most powerful weapon China has today? It is our economic power, especially our foreign exchange reserves (USD 2.8 trillion). The key is to use it well. If we use it well, it is a weapon…

China must have enough courage to challenge the US currency. China can act in one of two ways. One is to sell US dollar reserves, and the second is not to buy US dollars for a certain period of time, which will weaken the currency and cause deep economic crisis for Washington…If China stops buying, other countries will pay close attention and are very likely to follow. Once the printed excess dollars cannot be sold, the depreciation of the dollar will accelerate and the impact on Americans wealth will be enormous…“This approach, it said, is market-driven and it will not be able to easily blame China. The US will not be able to withstand this pressure.”

We must cease in our arrogance and recognize the very real threats we face. Evidence of our vulnerability is shown almost daily in the media. 

All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved

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