THE WAR: ‘Nuclear’ Option in a Trade War

lighteye (71)memberin Deep Dives • 4 years ago (edited)

On Wednesday, June 10th 2020, Federal Reserve Chairman Jerome Powell, following the central bank’s two-day policy meeting, has revealed FED’s strategy until 2022… and leave China with no other option but a ‘nuclear one’.

“China Dumps Dollar!” We have heard it so many times before, and nothing dramatic on that front ever happened. Why would this time be any different?

Well, so far, China didn’t have interest to attack U.S. Two economies were so dependant on each other, that the damage would be very hard to direct and control. Here’s how the situation was described a year ago:

Duration: 4:29

China hoped that U.S. government will come to it’s senses, reject trade war and back to normal business for the benefit of all. Didn’t happened. Instead, Trump has brought more tariffs, more tension and open attacks to the Chinese economic interests (cutting the supply lines under the coronavirus ‘pandemic’) and territorial sovereignty (Taiwan and Hong Kong rebellion). Completely insane idea (probably instilled to Trump by Peter Navarro) of ‘easy to win trade war’, has forced China to reconsider its vectors of relationship with U.S.

From an economic standpoint, China has already surpassed U.S., and coronavirus ‘crisis’ clearly emphasized that. But the U.S. still has the strongest tool for driving the World economy – a financial one – full control over the emission of the World’s reserve currency, U.S. dollar.

So, why would this time be any different?

In its relations with U.S. China was long time balancing between damage and benefits. Their foreign policy was peaceful because they DO need U.S. market, with certain signs of dissatisfaction expressed through, for example, joining the BRICS bloc, finding ways to trade without U.S. dollar…

Duration: 12:52

…but not attacking dollar itself. The US Federal Reserve strategy to opt not to lower interest rates below zero and to print astonishing amounts of fresh fiat, has made Chinese government to reconsider its non-belligerent policy. Fears over the falling value of US currency after FED has printed over 6 TRILLION dollars since the beginning of this year, have led China to a decision to actively sell its share of US debt, of which it owns more than trillion dollars.

Duration: First 11:00 minutes

Beijing officials are aware that printing of so enormous quantities will eventually left China with a pile of worthless paper. Therefore, in the situation of unprecedented tensions between two countries, China no longer benefits from a lenient policy. And so, the time for a counterattack has come…

‘Nuclear’ option

At the current, holders of a greatest part of U.S. debt out of United States are Japan and China. They hold a bit more than 6% of U.S. debt each. How a 6% can be ‘nuclear’? Do United States has its own ‘nuclear’ capabilities? Of course. Here is Mike Maloney to explain the mechanism:

Duration: 20:12

So, it’s not a 6% only. It’s a destruction of a mechanism that has allowed trade between two largest economies in the World. With that mechanism removed, confidence into the dollar will melt, with unforeseeable and catastrophic consequences for both countries. But that is what you can expect when you weaponize World reserve currency:

You may be tempted to describe this war to the death of economy in the terms of fatalistic philosophy: “I die, you die harder”… Still, China does not want to die, despite the activation of the ‘nuclear’ option. They have long been preparing for the worst case by buying gold, establishing payment lines out of U.S. dollar with the most important trade partners, loaning U.S. debt to other countries, investing it in a ‘Belt and Road’ project, and preparing their own digital currency. China is doing their job quietly, but don’t be surprised if you wake up one day and realize the World has a completely new financial infrastructure, with only a traces of Bretton Woods system among the colonies most faithful to the former Empire.

In the current situation, Beijing’s announcement of plans to issue sovereign Chinese digital currency in time for the 2022 Winter Olympics, looks very much like setting a deadline by which the dollar will end its status as the world’s reserve currency.