The Web site’s headline was certainly arresting: “China threatens to trigger U.S. dollar crash.”
And so was the first paragraph of the story in Britain’s Daily Telegraph: “The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of U.S. Treasury bonds if Washington imposes trade sanctions to force a yuan revaluation.”
This is one of those threats beloved by thriller writers that is theoretically plausible but economically impractical and, if carried out, would be as damaging, perhaps even more so, to China as to the United States.
The Chinese have eagerly snapped up U.S. bonds — in effect, lending us money — to gain access to the world’s largest export market and to accumulate dollar holdings, said to be $900 billion now, in the world’s standard reserve currency.
The threats were made by two senior officials at Communist Party organizations, and the fact that the two weren’t immediately slapped down by the government suggests the threats have semi-official backing.
If China dumped its dollar reserves, it would certainly drive down the value of the dollar and maybe cause it to crash — and with it the value of China’s own savings. China’s phenomenal economic growth is driven by exports. But China would immediately lose the huge U.S. export market, the cost of its own exports on world markets would rise and the global turmoil would further diminish the demand for those exports.
China’s own economy would suffer; so, too, would ours, although the U.S. economy is much less dependent on international trade. Alarmed lawmakers here and in other nations could begin raising protectionist barriers with the likely consequences of a global recession, even another depression.
The easiest way to combat this prospect is for Congress to balance the budget and quit enacting tax cuts and spending programs that must be financed with borrowed money. The worst way is the course being advocated by some congressional Democrats — punitive tariffs on Chinese goods.
The idea of intentionally triggering a dollar crash is something best left to the thriller writers.