Big Lizards:Blog:Entry “The China Syndrome Counterpunch”

Could China shrug? Dafydd ap Hugh doesn't think it's that much of a threat. He writes in his post: “The China Syndrome Counterpunch”.

...fearmongers suggest China could threaten to dump all their T-bills at bargain-basement prices, driving down the value of the bonds we need to sell to finance our out-of-control spending. The sudden drop in bond values would force us to jack the interest rate through the sky, just to get people to buy them. This in turn is supposed to drive our prime rate into the stratosphere as well, bankrupting the country.

To avoid this scenario -- dubbed the "China Syndrome" by some economists -- we will (so goes the argument) give the Commies anything they demand in the way of foreign and domestic policy and military stand-downs... to appease them, placate them, and keep them from carrying through their extortion.

(Skipping over his cite of Beldar's explanation of why it's not that much of a threat.)

...I have another angle on the whole thing. I say it would be absolutely wonderful for us if the Chinese really did enact their eponymous syndrome!

So why am I right and all those professional economists wrong? Because they think like acolytes of the Dismal Science -- that is, dismally -- whereas I think like a novelist.

Here is my scenario:

1. Red China threatens us with a China Syndrome unless we sever relations with Taiwan (for example).

2. We tell them to go stuff an eggroll.

3. They decide to call our "bluff," and they really do dump all their T-bills at, say, half their current value.

4. The Federal Reserve jumps into action, working through proxies to buy every dang Treasury Note China sells, as many as we can get our mitts on.

5. Now that we have bought back hundreds of billions of dollars of our "debt" for fifty cents on the dollar, we wait for the dust to settle and the market to recover -- then we sell them again for the normal price.

6. We send a letter to Beijing, thanking them for their generous donation to the Save Liberty and U.S. Sovereign Health (SLUSSH) fund. With heartfelt thanks, we settle back to enjoy our windfall profit on our own debt instruments.

The moral is simple: Whenever any entity -- whether individual person, giant corporation, or sovereign nation -- buys or sells bonds, equities, derivatives, collectibles, futures, or indeed any other investment instrument on the basis of politics, party, policy, or pique -- that is, whenever one makes investment decisions for any reason other than pure economics -- that entity is going to lose its shirt... along with its coat, tie, pants, and undies.

This Lizardian Rule of Thumb applies to universities that divest their stock in Israeli companies to protest Israel's dealings with the Palestinians; it applies to lefties who dump their mutual funds if they contain Starbucks or Nike stock; and it applies to conservative Christians who will only invest in companies that are run by ministers: You're going to lose a huge wad of your return by letting extraneous circumstances dictate your financial decisions.

Of course, doesn't this depend on an administration savvy enough to recognize this opportunity?