Courtesy of
The Happy Reason Man, we get a particularly loathesome example of the Gold Bug, one that's been infected with, of all things,
Mercantilism.
First, let me allow Adam Yoshida (a Canadian who devoutly wishes he were anything but- much like, say, Steven Harper) explain his idea in his own words.
Let’s step back for a second. Just how much does the United States owe? At the present time the entire US public debt stands at roughly seven trillion dollars. About 2.1 trillion dollars of that is held by foreign governments and investors. That percentage is seemingly increasing with time as foreign governments (especially the Chinese) continue to purchase American securities. While no comparable figures are available for most foreign nations: in 2001 China’s public debt was estimated at just 3% of its entire GDP so, in other words, the ratio of Chinese public debt held in the United States to American public debt held in China is massive.
So, what exactly do I propose? Simple: if China attempts to use its financial powers to interfere in the US economy, influence US policies, or do anything else harmful to the United States or beneficial to China, then the United States should repudiate every single cent of US public debt held by the Chinese government, Chinese businesses, Chinese citizens, or residents of China. In August of 2003 the Chinese were estimated to hold some $124 billion in American securities. That, of course, only counts those securities that we know about and does not consider the rapid rate at which the Chinese have been accumulating Treasury bonds.
First, note this phrase: "Do anything else harmful to the United States
or beneficial to China". This means that Adam is forced to make a choice- either force a situation where both countries lose, or admit the possibility that both could win. He's obviously chosen the former. I'll get back to this later.
The normal reaction to an action like this would be "whoa! This would ruin the American economy! The price of American bonds, stocks, and dollars would drop like a stone because nobody could trust the Americans not to screw with it for obviously political reasons!" They'd have a point, too, because the only way that this sort of idea could possibly work is if the White House took over the functions of the Federal Reserve, as there's no way Greenspan would allow this. With the crash of pretty much every asset in the United States, one would think that Greenspan would be staunchly opposed. Yoshida's claim that the United States could simply insist that no further action is forthcoming is touchingly naive.
Yoshida supports this, though, because he thinks it'd do more damage to the Chinese:
Thinking about this, consider just what the loss of both the $124 billion in US Treasury bonds and a cut-off of trade with the United States (which, one way or another, would inevitably follow a US repudiation of all foreign debt owed to China) would do to a developing Chinese economy and, in particular, to China’s international economic position. The Chinese would be very lucky to survive such a move with only a lengthy economic depression. More likely, we would see famine, riots, and political disorder in China. The entire Chinese ‘new economy’ would disappear virtually overnight, making instant beggars of those who once aspired to mount a challenge to American power.
Yoshida's Canadian heritage have done him a disservice, because he forgets one word that every Canadian would know should lend him caution:
CUBA. The whole reason Cuba's economy has been able to survive being completely cut off from the enormous American market is because
other countries are willing to trade with it, and this is no doubt what would happen were the United States to cancel its Chinese debt. The loss of trade to the United States would be quickly made up by trade with other countries, especially when the price of Chinese goods and labour drops like a stone. The "New Economy" that really matters- that of ideas and skilled labour- won't go anywhere, and neither will the factories and workshops that have made China such a powerful trading country. Yes, the loss of foreign assets will hurt, but it won't cripple them, especially with the dominance of the government over the economy. They'll be able to buy other stocks and bonds in other markets in other currencies.
On the other hand, the United States economy will suffer a massive blow, due to the loss of billions of dollars in real investment and a staggering loss of credibility, one that would make history. How does Yoshida propose to deal with that? Unbelievably, he's going back to the
gold standard.
The answer might be to time any moves against China with a surprise return of the US Dollar to the Gold Standard. This would be necessary, in part, to stem any loss of global confidence as a result of American economic actions against China. All Americans (and nationals of friendly foreign nations) could be given a fixed amount of time to exchange all of their old American dollars for new Gold-backed dollars, with all US funds originating in China being ineligible for transfer. With stern enough measures, I would expect that the Chinese would be unable to launder more than a small fraction of their massive reserves. Foreign banks (or nations) which collaborate with the Chinese, knowingly or unknowingly, would share in their fate.
For dollars? You jest. They'd be exchanging them for
Euros, silly, that and Yen. The gold-backed dollar will be seen as entirely untrustworthy, considering the mercantilist move that prompted the switch. What's to stop the U.S. from changing right back to modern greenbacks, or decide to change the value of a dollar vis a vis gold? The Federal Reserve is already gone, so there would be no confidence whatsoever.
Meanwhile, the American economy would be plunged into a depression the likes of which the world has never seen.
Never. A Stock market plunge, bond market plunge would no doubt cause people to hoard money, and switching to the gold standard would place the American economy into a liquidity trap the likes of which Keynes' worst nightmares would be a mere pale reflection. It would be the end of American economic dominance, guaranteed. The most market-unfriendly policy in Europe and Asia would be a minor irritant compared to the mess that would be the American economy, and investment would flood those regions.
American assets abroad would be worthless as well. Any country that owes the United States debt would have precious little reason to pay up and every reason to declare it just as "null and void" as the Americans did. What would happen if they decided not to change their debt into gold-backed dollars? As the old bills would be worthless, and as the countries' debts are denominated in such bills, the U.S. would discover that it had just lost as much foreign debt owed to it as it had owed to the Chinese! The South Americans would certainly be happy, but it'd ruin Corporate America.
So why do this? Why ruin your own economy? Only this: fear.
Now, I’m not advocating that any of this take place at the present time. After all: it would probably, in the short term at least, cost a fair number of American jobs. However, it’s good to have such a plan in America’s back pocket: and for the Chinese to know of it. Moreover, I would greatly prefer to endure the short-term dislocations caused by such a strategy than I would live to see the Chinese become more powerful than the United States.
China is our enemy. It might suit our short term purposes to deal with them for the present time, but we must never forget: they are our enemies. Better to die a thousand deaths than live in a world ruled by the Chinese. If we must, someday, pay an economic price to destroy the Chinese threat: so be it.
First, watch the "our" there, chum, neither Canada nor the United States treats China as a true enemy and has little reason to do so. More fundamentally, though, Yoshida is falling into an old pattern of ignorance, one that I mentioned earlier: mercantilism, the idea that economics is a zero-sum game that one country wins and one country loses. Both China and the United States gain from the Chinese ownership of American debt- China gains stable sources of a stable foreign currency, and the United States benefits from the billions of dollars in investment that is principally responsible for American capital-driven prosperity. Neither is the "winner", because there is no winner or loser, only trade of what one has for what one doesn't. Yoshida doesn't understand that. It makes sense, not many people do. That doesn't make his idea anything but lunatic.
I'll finish by noting, with amusement, the "better to die a thousand deaths" bit. It's actually richly ironic when it comes to China. See, prior to the infamous rapproachement between the U.S. and China in the early 70's, China was the more extreme of the two large communist powers. They intensively criticized the Soviet Union for playing nice with the imperialist oppressor. The Soviets, annoyed at Chinese extremism in the face of nuclear armageddon, reminded the Chinese that nuclear winter was in nobody's interest. The Chinese believed that they were willing to fight a nuclear war, because the survivors would build a socialist paradise on the ashes. The Soviet response went something like this:
"the Central Committee of the Soviet Union… cannot share the view of the Chinese leadership about the creation of a ‘civilization a thousand times higher’ on the corpses of hundreds of millions of people"
"Better to die a thousand deaths", Adam? I think the appropriate quote might be "I have seen the enemy, and he is us".
Lunatic.
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