"China sits on a huge, huge store of American dollars, in the many hundreds of billions, and their purchases of our Treasury Bonds are the only thing keeping the dollar afloat..."

One minor point: that cash reserve is dwarfed by the one owned by Japan (I forget the numbers; it's a factor of 3 at least).

Major point: the US trade imbalances are caused by a "global cash glut" worldwide. This is according to Ben Bernake, our new Fed chairman, among other experts. The U.S. is the best place in the world in which to invest right now, and so the dollar is driven up -- not just by China, but by everyone. This high dollar value in turn causes goods & services from China and elsewhere to remain cheap for U.S. consumers, and so the trade imbalance remains.

And yet, only about 15% of that global pool of cash is going into the U.S. If China cut back on its treasury purchases, others would take their place.

So -- how much power could China really have against the dollar?

Furthermore, it would be absolute suicide for them to try to hurt the value of the dollar, since such a huge fraction of their economy depends on selling goods to the U.S. Not to mention the devaluation of all that money they have invested here.

On the matter of China's military buildup -- well, frankly, why shouldn't they build up their military? What self-respecting country won't try to modernize national defense as their economy improves?

And remember, it's still a fact that the US's military expenditures are larger than that of *all* other nations' combined -- including China.

This leads to the essential point of the article -- that saber-rattling on the part of the U.S. would only serve to encourage more military build-up in China (look at how well this is approach working with Iran, for example). If you want to guarantee a new Cold War, then you go and do what the Bush administration is now pursuing. And of course, that probably *is* the goal, to secure an indefinite supply of taxpayer funding for the war industry.

Come on

"China sits on a huge, huge store of American dollars, in the many hundreds of billions, and their purchases of our Treasury Bonds are the only thing keeping the dollar afloat..."

One minor point: that cash reserve is dwarfed by the one owned by Japan (I forget the numbers; it's a factor of 3 at least).

Yes, I'm aware that Japan also has hundreds of billions of US dollars. I should say that "Japanese and Chinese purchases of Treasury Bonds are the only thing keeping the dollar afloat." I should have worded that sentence that way, but I wrote the addendum hurriedly. I didn't think it pertinent to include mention of Japan in the original letter, because Japan is our ally, and I see zero likelihood that they'll snub us and throw their lot in with China. But if you think that China couldn't sink the dollar singlehandedly, I'd sure love to bet money on it with you. I'll even buy you suspenders and a barrel to wear, once you lose your shirt. Many people think (though, as mentioned, not Professor Ferguson) that the Chinese will never do injury to their manufacturing sector by shedding their dollars. This is the typical American, thinking that other people worship the dollar as their holiest deity, the way we do. They don't. China is more than capable of throwing their entire manufacturing sector out of work to further a hegemonic goal, especially if they go to war and need to do so as a tactic.

I made no moral judgment about China arming up. They border 19 countries, many of which I would consider volatile at best, several of which are nuclear powers, several of which have million-man armed forces, and several of which they've gone to war with within the last couple of generations. However, it is also indisputable that their hegemony in the region would directly affect American allies and important trading partners such as Taiwan, Japan, Indonesia, and India. It would also affect--IS affecting--supplies and direction of energy and raw materials in the region, and, as I mentioned, in our own region. For Canada to divert oil from its oil sands to China instead of the US is a huge development. I don't advocate saber-rattling, as when one of our generals let slip, or bragged, last year that we intended to make India a 21st century military power, with "a full understanding of all that entails." This is tipping our hand, is clumsy, and, as mentioned, China has kept perfectly silent on what it intends to do with its own military buildup. But if you're suggesting that we take no energetic action on the matter, just to avoid agreeing with Donald Rumsfeld and Condoleezza Rice on something, I disagree. Do you propose that we remove ourselves from the world stage entirely, forget our promises to back up Taiwan in case of war, and leave Japan to the tender mercies of China? Don't fool yourself: they're behaving with unbelievable greed for power and influence, not to mention raw materials; these are tools for their expansion of power, developed over decades as a response to America's hegemony, not because they suddenly became drunk on money. I only wish that we had taken more energetic action on the balance-of-payments deficit, before it became our biggest liability in the coming struggle.

If you're thinking that Japan and Indonesia will step in to keep the dollar afloat if China does dump its dollars, though Japan has thrice as many dollars, that's another bet I'd like to make with you.

I wondered what the actual figures of the dollar holdings of Japan and China were. Your figure was right: according to this article,

http://www.safehaven.com/article-3097.htm

Japan holds 700 billion dollars in US Treasuries, while China holds 200 billion. The interesting thing, however, was that far from continuing to prop up the dollar as they'd been doing through 2004, the article says that last year, China and Japan stopped doing so (this, I suppose, is the followup to the announcement that I mentioned from a couple of years ago, that China had begun to diversify its holdings; the other shoe dropping was the selloff of dollars--happened when I wasn't looking). Apparently, China's purchase of treasury bonds has slowed to a trickle, while Japan's has gone negative, as they've sold off $10bn worth. Contrary to what I'd imagined, the Japanese are selling, instead of the Chinese, who I'd assumed would do so to leverage us, during a confrontation. The dollar, at this moment, is being propped up by shadow purchases that are coming from Caribbean and London banks, likely from third parties of unknown origin, the article says. Norway has cut its holdings of dollars to half.

So I was incorrect in saying that China, and not Japan, would be the first to divest (though China's huge purchases of Treasury Bonds have slowed to a crawl, and it is possible that Japan is only reacting to this). On the dcmeserve side of the scorecard, the charts in the article show Korea buying some bonds, but for the most part, no Asian country is stepping in to fill the gap (though it is possible that the companies buying through the Caribbean or London banks are Asian; the article opines that it might be OPEC countries, recycling dollars, and whoever it is, it is someone who has a big vested interest in keeping the dollar afloat, which means either American financial institutions or other companies or governments with huge stores of dollars).

The question is: what does it mean? If Japan and China are divesting, and the dollar must be propped up artificially by whoever is doing so, I see the prediction of a dollar sell-off as inevitable. If countries like Japan are divesting at $10 billion dollars a throw, it means that the poker winners are starting to fake their yawns and cash out. What happens then? 1) when the dollar crashes, our interest rates go up; therefore, 2) the housing market crashes; therefore, 3) retail crashes, as homeowners stop making purchases by borrowing on their homes, and those they buy from can't buy with the dollars the homeowners would have given them. What else happens?

I'm glad of your challenge, dcmeserve. You spurred me to do a little research. Looks like instead of saying "the shoe will drop," I should say, "the shoe is dropping." Hold on to your tits.