U.S. and China

Hello everyone, I wanted to discuss something that deals more with specific policy and politics than with the theory of government, but this seems like the best place to for the thread nonetheless. First, what is the likelyhood of a Sino-American general war? Secondly, how would this likely play out, especially in terms of economics?

The first question:

According to most analysts, both independent and from within the industry, peak oil has arrived or will very shortly be arriving; this refers to the time when production peaks. The peak of new discovery is long past; it arrived some time in the early sixities. Starting in about 2010 there is expected to be a real disparity between supply and demand, not one caused by embargoes, hurricanes or other temporary problems. China is rapidly expanding its domestic oil consumption; towards the end of the 20th century it was a major oil exporter and is curently the third largest importer. The authoritiarian chinese government, despite vigorous efforts to nip dissent in the bud, is growing unpopular as is its official ideology. Many suppose that the enormous industrialization and growth in China over the last few decades is all that prevents a regime change. A bidding war between the U.S. and China over remaining oil resources would seriously dampen this growth and an actual loss of supply would be devastating. Might such a regime go to any lengths, including war, to preserve its economic machine and itself?

As we all no, the middle east contains the majority of the world's oil reserves, which dominance will only increase as North American, European and other fields continue the trend toward decreased production. China has been courting 'rogue regimes' for some time, but lately with increasing intensity, around the world that have oil to export: e.g., Venezuela, Sudan, Nigeria, Iran. There are many possible catlysts fro a confrontation between the soon-to-be oil starved great powers, especially in the middle east. If some event, such as the collapse of the house of Saud, were to provide an opportunity for China to infringe on what has traditonall been a oil supplier, or visa versa elsehwre, a war seems likely, even if only a proxy war.

As for the consequences:

While I have no doubt that the U.S. would prevail militarily in a general war, (though the doubt increases as China modernizes its military) what concerns me is the ~500 billion dollars in treasurt bonds that the chinese government holds currently (this amount is only likely to increase in the future.) One of the reaons for the low inflation in the U.S., relative the recent years enormous deficits, is that the chinese have been willing to buy alot of bonds. during a war, that would certaknly stop. More important, however, is the question of whether or not China might stratgeically dump all or most of its holdings, causing a sudden drop in the dollar and forcing the U.S. government ot raise its interest rates on bonds in order to attract more creditors, which would be even more essential to the functioning of the government in wartime than in peace.

This in itslef isn't so bad, except that the federal government already has alot of debt; having to borrow enormously for a war, at suddenly increased interest rates, would generate alot more. It is always the case that as debt rises, the rates have to increase, because there is a perception of greater risk in buying givernment bonds. However, eventually, there will be a critical point at which the issuing of higher interet bonds and the increase of the debt will become an auto-catalytic process. The debt would rise exponentially, as would the interest. If the U.S. Government's entire revenues cannot cover at least the defense budget and the interest, the war would be over. Currently, the interest on the debt consumes almost a third of the revenues and is projected, even without a war with china, to consume all of it by about 2040 simply because of the aging U.S. population and the expansion of entitlement programs, so this scenario is not really that far-fetched.

The only solution to such a fiscal crisis would be either to masively cut spending (during a war, it would have to be entitlement spending, not defense), massively raise taxes, or simply print money. Almost without exception, governments faced by this kind of crisis have historically chosen to print their way out, causing hyperinflation and essentially, economic collapse. Would american soldiers keep fighting if they were being paid in worthless dollars? Will the government have to issue a super-dollar, worth a million of the originals?

This all worries me alot. I have been thinking about the challenges to American hegemony for while and also the long-term effects of social spending and imbalanced budgets in the U.S., but only recently have I seen the potentially lethal combination of the two.

Any thoughts?