Looks like the Europeans are as Dumb as Americans...maybe even Dumber...?
The End of the Dollar
In January, Chinese President Hu Jintao was wined and dined with a lavish state banquet at the White House and other official ceremonies usually reserved for America’s closest friends and allies. Why? One must be very polite when entertaining your banker—even if you don’t like him and he doesn’t like you.
Yet there is another more ominous but closely related reason.
For years, China has warned America that its support for the dollar was not unconditional. The warnings fell on deaf ears. Confident that China was virtually forced to lend money to America, Washington embraced a borrow-and-spend policy that would have destroyed any other currency.
Then last year, when it became clear that America could not borrow enough money to pay the bills—it crossed the Rubicon, declaring that the laws of paper money no longer applied to the mighty dollar: America would just print whatever money it needed to pay the bills. Federal Reserve Chairman Benjamin Bernanke declared he would start by conjuring $900 billion—75 percent of America’s borrowing needs—out of thin air.
The world was shocked that America would so abuse the world’s reserve currency. France, Germany, Russia and China were outraged. But Americans wagered that the world is too caught in the dollar trap to do anything about it.
So far, this strategy has worked out pretty well for America. With several European countries falling apart, the dollar has firmed up, and safe-haven money has continued to flow into America. But signs are, that is beginning to change.
Europe’s Sugar Daddy
As the Washington Post wrote, “[S]trange things are happening in Europe—none stranger than the emergence of China as the Continent’s sugar daddy” (January 16).
Wait—wasn’t China America’s “sugar daddy”? Well, just follow the yen. In July 2009, China held $939 billion worth of U.S. treasury debt. More than a year later China’s holdings have fallen to $895 billion. This is big news—and surely isn’t lost on Washington. For more than a year, America’s most important creditor has stopped lending new money to America. Instead, China is investing its money, and its confidence, in Europe.
Today, Europe matters more to China than any place in the world. With 400 million First World consumers and the world’s largest economy, the European Union is by far China’s biggest export market.
It is a reciprocal relationship, too. China now directly holds over $900 billion worth of eurozone national debt. In Greece, China is investing billions more as it attempts to build the Mediterranean port city of Piraeus into the “Rotterdam of the south,” and create a modern-day silk road linking Chinese factories with consumers across Europe and North Africa.
Most importantly, China has thrown its weight behind the euro...