THE FUTURE OF ECONOMIC WARFARE?

Imagine the following scenario ...

The next president of the United States is confronted with an increasingly weakened U.S. economy. Relations have exploded between India and China. China tells the new U.S. president that if the U.S. doesn’t follow China’s lead they will begin dumping dollars and other dollar denominated assets they hold (e.g. treasury notes and U.S. stocks). Who holds the upper hand here?

This is an issue of increasing concern in the U.S. Congress and in the U.S. Department of Treasury as foreigners continue to buy up U.S. assets while continuing to hold on to increasingly weakened U.S. dollars. Former U.S. Treasury Secretary Lawerence Summers asks,

What about the day that a country joins the ‘coalition of the willing’ and asks the U.S. president to support a tax break for a company in which it has invested? Or when a decision has to be made whether to bail out a company, much of who’s debt is held by an ally’s central bank?

Critical here is whether other countries might use their economic weight in the U.S. economy to extract concessions, or compel us to act a certain way. Threats like these have been made in the past. And we should know. We did the threatening.

One of the best examples of this was when the Eisenhower administration threatened to ruin Britain’s currency if they didn’t change course after participating with France and Israel in the Suez Canal events of 1956. It was reported that Britain’s Prime Minister at the time, Anthony Eden, was reduced to tears over the U.S. threat and was, eventually, forced to resign.

While I don’t agree with U.S. Deputy Secretary of the Treasury Robert M. Kimmitt’s assessment (he seems to believe we have nothing to worry about), he brings up several points to ponder.

- Mark