Don’t get me wrong. This is not intended to be negative in anyway, as I have lived in China for years, and I greatly admire the people and culture. The nationalism that is stoked by the Party, and the use of nationalism as a political mandate is just not right and it creates friction, ugliness, and it really does nothing to address the fact that we are all in this together and that world is only getting smaller.

Furthermore, who’s their biggest FOOD source? The U.S. In an economic war of dumped T-Bills versus canceled wheat contracts who’s going to win?

China and the USA are inextricably linked for the next 30-50 years. For years China has manipulated the yen at the expense of the dollar; the short term advantage being to create a massive market share for Chinese made goods. Unfortunately, Chinese imports to the USA and Europe are coming to a not so soft landing halt. Many Taiwanese and American manufacturers have already shifted production away from China and to other less expensive countries.

China will soon have its own problem of tremendous lay-offs as exports dwindle, the dollar cheapens, and Chinese goods become too expensive as they face pay cost increases, more demands from workers, and soaring raw materials costs.

The US has some alternatives, including re-energizing its own manufacturing base at home as the dollar weakens, shifting purchasing away from China towards India and other developing nations.

China has made its own bed, as has the U. S., but dollar devaluation may be just the thing needed to level the playing field and increase employment at home for an export market.

1. The US is not going to run out of oil, or even be priced out of the energy market. The US has a much higher energy efficiency than China or India (China, in fact, uses MORE energy than the US to produce LESS output). Not to mention, the US’s oil reserves – when one accounts for the rapidly developing shale market – are larger than Saudi Arabia and Russia combined.

2. Many act as if Chinese have “savings for a rainy day,” but this is not how things work. China runs an account surplus because it exports massive amounts of capital through purchases of assets like UST bonds; it is not investing in these assets because it has tons of “free” money lying around, but because it runs a trade policy that takes money AWAY from households in order to keep interest and exchange rates down, so as to keep export prices artificially competitive.

3. If China dumped the USD or UST, that’s good! That means a lower trade deficit for the US and more jobs in the export industry. It also means a more balanced US economy, with more manufacturing and investment to go along with consumption. The USD as global reserve currency is a burden, as it lets surplus countries exploit the US market to an absurd degree, and it screws up US finances by making borrowing too easy.

4. Sure, China can invest its savings in gold. That will work out smoothly, seeing as how the combined value of all the gold ever mined ($6 trillion) is less than the value of the US bond market, or even the Japanese bond market. Gold, like other commodities, is also prone to wild fluctuations in value.

5. Peter Schiff is clueless as usual. An appreciation of the yuan means that unemployment rises as the export industry dries up. It also means that China would have to confront its investment-driven growth model, which has squandered resources for decades. The over-promotion of investment (HSR, buildings and other construction) is a major reason that the Chinese state is rich while its people are poor, and a good explanation for why consumption in China (like consumption in post-1990 Japan) is so anemic relative to its GDP.