China has financial leverages
I agree that China has enough liquidity to invest more internally. But the primary responsibility is first to keep China safe. Therefore, the investment to create China's financial leverage was not really to make money, but to maintain peace, which I think is priceless.
I think you misunderstood the purpose of having financial leverage. It's not to bribe the US administration into controlling the neocons. The world already understands that since it owns a large amount of dollar denominated assets, all it needs to do is sell some of those assets and collectively it would be enough to collapse the US economy, since US is a debtor nation and really doesn't have liquidity to payoff all those sold assets. That fact alone, together with the knowledge that China and the rest of the world hold huge amounts of dollar denominated assets, is enough of a financial deterrent for this administration to keep the neocons in check.
Someone mentioned that China sold out the September Treasury auction. I cannot confirm if it was in part or whole. Anyway, it wasn't surprising that soon thereafter, Powell was sent to China in October to reaffirm the "One China Policy". Also, did you notice Greenspan increased interest rates this week? This further strengthens my third point. Without China's financial help, we would be looking at higher interest rates and inflation.
One main reason countries try to manipulate currency is to gain a trade advantage. But if both currencies are pegged together, there is no advantage. China can afford to peg the currency since it's a saver nation with liquidity. Eventually, US will need to take action to support its own currency. Otherwise, it will no longer be trusted as a de facto currency reserve, nor a petrocurrency. China already knows that so there is no fear to continue pegging to protect its trade and existing investments. Now, let's say that the neocons do something that so anger the world that countries dump large amounts of dollar denominated assets, China can do likewise because while it holds a large portfolio, that portfolio relative to the entire Chinese economy is relatively small. As you know, China is already diversifying its currency portfolio and including a larger percentage of Euros just for this possibility.
Hyperinflation is largely due to supply and demand. The world is already adjusting their portfolio, moving more to Euros, so the demand of dollars will obviously decrease. Now if the US economy continues down this path with more military spending to try maintaining military hegemony, it will eventually be forced to print larger and larger amounts of money to service the debts and deficits, thereby increasing supply way beyond actual demand, resulting with hyperinflation.
The other issue that affects demand for the dollar is the creditworthiness of the country itself. If some third world country with a questionable credit history and weak economy was printing their money, how much demand do you think they would have for their money given their weak economy and questionable credit? Once a country defaults, it's like wearing the scarlet letter and other countries would avoid future financial dealing with this defaulted country like they had the financial plague. Therefore, before default as the last resort, hyperinflation is preferred as the second to last resort.
Neocons have an idealistic plan. But there are holes everywhere on this ship. In order to carry out PNAC, the neocons would need a much larger military force. Could we be seeing a draft? If this is the future plan, then military spending will need to increase exponentially to support the larger military, thereby weakening the economy even more. Given the weaken economy, and how Iraq is turning out, perhaps Americans will wake up in time to stop it.
The world already understands it has the economic hammers it can use if US doesn't keep the neocons in check. Examples include:
Selling dollar denominated assets to collapse the US economy.
Another idea was bypassing petrocurrencies altogether by going to a direct barter system. This makes sense because a direct barter system would eliminate the risk of holding currencies. Countries are already doing this in smaller transactions that don't involve oil. Let's say the neocons get more aggressive around the world, I wouldn't be surprised that direct barter will be used not only for goods and commodities, but oil too.
To continue with your illustration, the frog is in the pot. The pot is on the stove. The fire is on a slow simmer. The water is warm but still currently survivable for the frog. The frog can still get a reprieve if the world can feel safe again from US hegemony. But time is short, and once we pass the point of no return, the lid of the pressure cooker will be locked and the frog's fate will be sealed. Optimistically, I choose to think the reprieve is not an illusion, but a ray of hope, in a world fearfully of US hegemony.
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