China's trade surplus may become the first country

China may think it has a balance of trade advantage, but they are wrong. As the US dollar shrinks against major currencies around the world, the value they hold on paper decreases. Our debt automatically becomes less without the US doing anything.

China's foreign exchange reserves are now approaching the trillion and a half dollar level, and this massive wad of cash is mostly kept as US dollars. China has earned this treasure through being the gleaming supermall for the shop-till-you-drop obsession that has swept the US, and to a lesser extent the rest of the Western world, this decade.

What Ben Bernanke is saying with his sharp interest rate cuts, and what the nation is affirming its approval of with the orgiastic stock market response that followed, is that it continues to hold no other value higher than the pleasure to be attained through its own excess consumption. In depreciating the value of the currency it uses to pay China for its goods, the US is telling China that it has no intention of paying China the full value for what it buys from it; that would be unacceptable, it would mean that there would be less money to buy even more stuff.

Of course, China does not have to continue to put up with this. It could stop accepting the funny money dollars, the depreciating greenbacks with Mickey Mouse's picture on the face instead of George Washington's. China could convert its foreign exchange reserves into other currencies by selling its dollars. As this would severely reduce the demand for US Treasuries in which China parks its reserves, US interest rates would have to rise sharply to re-attract the securities demand lost from China, and there would be little or nothing that Bernanke, Treasury Secretary Henry Paulson, President George W Bush, or even the US's first infallible-by-decree army general staff officer, the Blessed Holy Father General St David Petraeus, could do about it.

This would not be an easy thing for China to do, so the US feels China will not do it. If China actually did try to publicly sell all or a large part of its dollar portfolio the prices of the dollar assets remaining in the portfolio would undoubtedly fall sharply; China could lose a lot more than it gained. Still, Bernanke has just told China that, come hell or high water, he fully intends to filch away the value of their reserves. Maybe China could decide that it's a choice between losing a lot of money, fast, by selling its dollars, or losing a lot more, slowly, by keeping its dollars.

China probably is already diversifying away from the US dollar, but among all the cacophonous noise of the glorious roiling tsunami of inanity that is US public life, the actual signal information is being missed.
http://www.atimes.com/atimes/Global_Economy/II20Dj02.html

Rama, Our country has been spending monopoly money from many years ago - before the rein of George W Bush. If China begins to sell off US treasuries in the open market, the analysis presented by your article will come to pass; mainly that interest rates would have to increase to intolerable levels for our economy. Not only a recession is in the making, but the world's economy will be impacted as well. The irony of it all!