Unthinkable, until it isn't...

Like my anonymous commenter, most of cyberspace that's noticed the currency threat from Team Xinhua has written it off: the typical response is they would never do that along with look who noticed it first.

Except for Ian Welsh at The Agonist, who's noticed a complicating factor or three or four...

The reaction of most market watchers and economists has been to note that if China really does that the value of their reserves will tank--when you tank the US dollar, the value of all assets in US dollars also tank. It would also badly damage the Chinese competitive position, since a low Yuan relative to the dollar is how they subsidize their exports to the US. Dumping T-bills, then, would be the equivalent of cutting off your nose to spite your face.

But . . . Congress is, in fact, getting uppity. And what China is saying is that if Congress eventually does pass real, significant tariffs then China is in a position to retaliate - hard.

So higher levels of the government are now pouring oil on the waters, no, no, we would never do that... but the message has been sent.

Meanwhile, the Nelson Report says:

'Our conversation this afternoon can be paraphrased this way: "Putin is really angry with the US now because of Bush policy on any number of fronts, and as we are seeing on everything from using their intelligence services to carry out contract killings, to shooting rockets into Georgia, we are not dealing with a leader who feels he needs to be subtle."

'In fact, our friend insists, "Russia thinks the US economy now is really vulnerable, and that using their huge foreign exchange reserves as a weapon against us...say by demanding payment for their oil only in Euros...may make a lot of sense."

'This expert's conclusion: "I can tell you right now that Wall Street may not think the Chinese are serious, but Moscow is watching this very closely, and may well come to a conclusion that we don't like!" '

The Agonist has made the argument that America has screwed around with Russia too often as well. I don't see any significant downside to Russia from doing this. And it is one more nail in the coffin being constructed for the US dollar's days as world reserve currency. As country after country moves off the dollar and onto the Euro, the dollar will lose its reserve status. We were talking about this 3 years ago at the BOPnews, and it is continuing apace. People forget about it, because it's happening slowly - but it is happening. And as the dollar continues under downward pressure (pressure that is only kept survivable because of central bank intervention) the willingness of investors to hold dollar denominated assets will continue to decline. We're looking at dollar/Yuan parity eventually. And I don't think eventually is as far out as people might think.

Now, let's push this out 5 to 10 years.

Everyone likes to say that the market for oil is global - prices are set on global markets, and so it doesn't matter who controls it.

True... until it isn't. The majority of world oil is in the control of various government companies, not private ones. As the supply continues to tighten at various price points, and as that oil which isn't under control is tied into long term specific contracts (for example, the way China is paying a premium to lock up African oil reserves) this will become less and less true. Oil will be sold based on long term contracts from national oil companies. There is going to come a point, and most of us here today will see it, where you just can't buy oil on "the market" because it's going to be all tied up.

At the point that both these things happen, the US is going to be in a world of hurt. The US economy, at the top end, is now about selling paper. But no one's going to want that paper in such a world.