BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

'Dump The Dollar', China Daily Op-Ed Writer Says

This article is more than 10 years old.

As the U.S. sits two days away from defaulting on its massive $17 trillion debt, an op-ed by a British professor published in the China Daily on Monday said the country should reconsider its dollar holdings.

China is the world's largest holder of U.S. debt, to the tune of nearly $2 trillion. Most of it is due to the massive trade surplus it enjoys with the U.S.  That money has to go somewhere, and it tends to find its way in U.S. Treasury debt.

But as Washington replays its favorite soap opera -- The Debt Debacle -- a new twist was added to this month's episode with the launching of Obamacare. Not ironically, the Republicans walked out on the job the day the Affordable Care Act went into affect. As Republicans control the House of Representatives, they can force the government to shut down because they can deny it the authority to borrow more. Obamacare was taken hostage as a result of a shutdown blamed on too much debt.

The Congressional Budget Office said this about the health care law back in 2010: It lowers the deficit, by about $124 billion over 10 years. And in 2011, when Republicans offered a bill to repeal the health care law, the CBO said that it increased the deficit, by about $210 billion over 10 years. The CBO could be wrong, but probably not as wrong as that narrative that Obamacare is driving the country to the grave.

Now into day 15, Giles Chance, an old China hand and professor at the Guanghua School of Management at Peking University, said China would be wise to choose another safe haven.

"China should gradually reduce its current dollar holdings as a matter of financial prudence and steadily work with others toward a new global financial architecture," Chance wrote on Oct. 14 in an op-ed titled "Time to Reduce Dollar's Hold".  He said, "Progress will be gradual and slow, because the U.S. will not give up its dominant financial role without a struggle. But the government shutdown in Washington demonstrates that now is the time to start that process."

Dollar doomsayers have been waiting for this moment. I don't know if Chance is a member of the dollar Apocalypse crowd, but his book "China & the Credit Crisis: The Emergence of a New World Order" (John Wiley & Sons, 2009), makes me think he might be. Whenever someone uses the term "new world order" in a sentence it tends to mean they view the world as a complex power struggle with deep conspiratorial elements. Which...somehow describes the world we live in just as good as any.

Chance noted in the op-ed that the shutdown drama was a Republican ploy to gut Obamacare.

"Many of the Republican politicians behind the shutdown come from the South, and they want to neutralize and destroy Obama. That is the reason why they object to Obama's 2010 Affordable Healthcare Act," he wrote.

But the sharper knives were aimed at the dollar itself, and the ever-shrinking value of China's dollar accounts.

The issue for the major lenders who have a stake in the United States' financial position, such as China, is whether the U.S. is a trustworthy borrower and, beyond that, whether the U.S. should occupy the dominant position in global finance that it does today. The made-in-America financial crash of 2008 was a direct result of the dollar's role as the global currency. This role forces the Federal Reserve to print dollars for export to other countries for use as a store of value and for business transactions. The creation of dollars far beyond its own needs encourages the U.S. to over-borrow and overspend....the dollar's supreme role is out of date. The guardian of the system has become too weak economically and financially to support the system."

The actors starring as American congressmen in the House failed to vote today on a plan to end the imbroglio. Anyone who knows Washington knows these antics will continue well into the final hours before Treasury runs out of money.  If a credit rating agency opts to cut the U.S. credit rating, the blame will fall on the shoulders of Congress first, the Republican Party second and Obama a close third.

Tuesday's failure -- a repeat yet again in a series full of God awful episodes -- leaves a bipartisan Senate plan negotiated by Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) as the any way out of the stalemate. If nothing comes of this in the next 48 hours, the risk of a U.S. default by the end of the week starts looking very real. It will make the United States the laughing-stock of the world, something most politicians in Washington will scoff at because "we" are the world and "they" -- the others who are jealous of our freedoms and our cool -- are just the children.

A bill that passed the Senate would receive Democratic support in the House if Speaker John Boehner brings it to the floor.  Boehner is against default, so he has his work cut out for him. If the U.S. does default, China's response would be the most interesting beyond our borders. They might just take Chance's China Daily piece as gospel from herein.