China has already stopped buying Treasuries. That is a shot across the bow. My guess is that China is afraid to roil the US Treasury market too much. If they did, then they'd be shooting themselves in the foot, because their sovereign wealth and reserves are tied to the price of Treasuries and their economy is levered up to the hilt. A far better tactic that they could use, and I suspect they will, is a program of Yuan devaluation, which will make their goods even more competitive and act as a dumping mechanism, exporting deflation to the rest of the world, especially the US. That sucks for us, because our Fed is trying desperately to get to 2% inflation and keep it there with only moderate success. With a new wave of deflation from China, they'd have to slow down the rate increases and QT, which would keep their posture deformed and make them unprepared for the next recession. The Fed's options are narrowing.
A trade war with China will absolutely have consequences on both sides. It's like the old Cold War nuclear M.A.D. scenario between Russia and the US, but this one is an economic one. |
