Tuesday, August 07, 2007

China threatens 'nuclear option' of dollar sales

This article from the UK Telegraph is as alarming as any in recent memory.

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

The symbiotic relationship between US and China has come to define our current globalized economy. It's a relationship based on mutual self-interests, notwithstanding the poisonous toy and seafood and funny paper that change hands. I believe that China had intended the Yuan to appreciate 5% per annum. For example, at the end of '06, the 12 month, non-deliverable yuan forward contracts were indicating an exchange rate of 7.41 by year's end. If this keeps up for 5 years, the yuan would have gained 25-30% on the dollar. This may very well be the most sensible way to bring the exchange rate into alignment; however, this being the year before presidential election, all bets are off.

All I've got to say is that, although gold will benefit immensely if China does dump its dollars, no gold bug should welcome this course of action as not even the most prepared survivalist would welcome the sight of mushroom clouds on the horizon.