Don’t panic. But pay attention.
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.
On so many levels, that discussion offers opportunities for students of economics to understand how markets, finance, and borrowing work. This news report alone could be the foundation for a couple of weeks of lesson plans on international finance, the Federal Reserve system, government spending, and general operation of markets.
Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.
Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing’s foreign reserves should be used as a “bargaining chip” in talks with the US.
Could China afford to try such a move? Would it sink their economy, too? How could the U.S. try to mitigate such a move? Does this mean the U.S. needs to seriously control trade with China, or would that kind of interference in free markets do more damage by itself?
The Dow dropped 387 points in trading on the New York Stock Exchange today. News analysts ascribe it to concerns over sub-prime mortgage lender troubles, which caused a panic in French markets today. The credit-crunch “ripples around the world,” according to a PBS reporter.
Disregard all hysteria. The ailing Greenback will not collapse this year, not in ten years, not in twenty years, not in half a century. There is no credible currency against which it can collapse. (Unless you count gold). None of the world’s rival power blocs have the economic and demographic depth to challenge American dominance.
What do your local newspapers say? How can you use this to weave together a coherent narrative for your economics curriculum, starting in a week or two?
Sources to beef up your classroom presentations:
- The neuropsychology of the attraction of subprime mortgages, at The Frontal Cortex
- International Herald Tribune on the crises in various markets, and the European Central Bank’s injection of money to calm things down.
- August 7 press release from the Federal Reserve Board’s Federal Open Market Committee (FOMC)