US$ Reserve as a weapon!

Macbeth said:

As for the legislative Yuan, they are not very cooperative.

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But, as I pointed out, that doesn't mean they take it as being their mission to block arms purchases. Part of the delay over the weapons now being approved was due to political wrangling unrelated to defence matters, in addition to how they were to be funded. The KMT has now dropped its opposition to the P-3C order & PAC-2 upgrades.

I won't say you are passionate about Taiwanese arms purchases - I was merely correcting an incorrect statement you made.

Part of it was because they didnt want to enter an arms race with China.

"In December, the island's Legislature sent part of a long-delayed U.S. arms deal package to a budgetary committee for consideration.

But the deal still faces an uphill battle.

Taiwan's opposition used its slight majority in the 219-seat Legislature to block the purchase for two years on the grounds it would propel Taiwan into a no-win arms race with its communist rival.

In July, Taiwan submitted a formal request to procure 66 U.S.-made F-16 C and D fighter jets. The U.S. been cautious over that sale because of the delays in approving the larger weapons package".



But supposedly they will discuss it again soon. So we will see.

Macbeth said:

Part of it was because they didnt want to enter an arms race with China.

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That's what they said. But it was just an excuse not to approve it - the reasons changed frequently. These were weapons the KMT had wanted before 2000 - Lien (KMT candidate) even promised to order them during the 2004 election. But because they lost again, they preferred to score some political points off it.

If the KMT win in 2008 (and still have control of the legislature), funding for arms purchases (except maybe the SSKs if the price/conditions are not suitable) will be passed a lot quicker, I can promise you that.

But supposedly they will discuss it again soon. So we will see.

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Not discuss - there will be a final vote on the budget. Unless the KMT does a complete U-turn and trashes all the promises/statements it has made, the Orion/PAC spending will go ahead.

What needs to be discussed is the purchase of PAC-3 batteries later on the in the legislative session. The F-16 deal may also be debated further.

You could speculate deeper as to why they didnt approve it and what they will approve. But we will just have to see how everything plays out.

Mr. FuManChu please don't forget the fact that the US sold F16 long before PRC started to accumulate his missiles across the straits. We all know the Shang Hai communiqu’e was the result of cold war. Just like US's support of Taiwan, it's purely a geopolitical exchange of national interests.

Let's back to the thread topic. Mr. Jwangyue's scenario will cause very nasty results for world economy. This is scenario jumped up from my mind. Let's start from refreshment of our memory of super-inflation in Germany after WWI and its cause for chaos of German economy and uprising of Hitler. China puts around 40% of its foreign reserve buying US treasuries. So do the other major foreign reserve countries such as Japan, Taiwan, and OPEC countries. Almost at the same time that Taiwan declared independence, all major stock indexes will tumble. Why? Because nowadays China and Taiwan supply more than 66% of electronic finished goods and electronic components worldwide, let alone those inexpensive daily consumption goods and car parts.

When military confrontation between China and US starts, as soon as China dumps the treasuries he holds, so will other major foreign treasuries owners. The acceleration of dumping will drive the depreciation of US dollar. The dumping of treasuries will also drive interest rate high. It is so high that credit crunch will cause trouble for cash scarce companies and individuals.

It should be no doubt that US can defeat China in military, but you must ask, 'How long and how much will it take?' Judging from the expenditure in Iraq, the figure might be hard to imagine. And after all these, we have to ask what it is really for.

You know, there is a side to this that people never really get. If the US $ depreciates, as it undoubtedly would in the face of all the bond dumping, then all American products would be artifically cheaper. This would cause an increase in orders for American goods from the rest of the world, and a decrease in American demand for goods from the rest of the world as equivalent American products suddenly become cheaper. Combined with a prompt shut off of all Chinese goods American domestic industries would be faced with a lot more demand for their products. So although American GDP would certainly decline due to dollar depreciation (every component transaction would be worth much less), American might not sink below its production possibilites curve into major unemployment because of increased demand.

However the real question is how much manufacturing capability does the US have left? How much demand would move to other countries? And this could also cause an energy crisis as the United States would no longer be able to buy oil with its depreciated dollars (the price of oil would rise absolutely AND relatively).

Dumping bonds would not be good for either country.

I guess economics class is good for something!

Is there and law that actually stipulates that when currency is dumped the other nation must allow it to happen? Unfortunately, the US could impose it's will on other nations (I mean, they do have military force left to blackmail other countries against dumping).

I believe that dumping the dollar is symbolic. In the worst case scenario, the United States might force other countries to accept their goods. Look at what Germany did in World War 2: there dollar was depreciated and look what they did.

that was then, this is now.

The whole point is that pretty much EVERY central bank loses monetary control mechanism if the dollar is no longer a viable reserve. And it won't be with a tril of extra US bonds floating around.

Well you can still control interest rates but that isn't going to do much if the very money is worthless. The only consolation is that the inflation would be worldwide, so the Chinese would think twice; I mean they still need to but goods from other countries and thus would have to deal with inflated prices. Oil would go through the roof. I mean how would you even buy it? It would take a while for oil transactions to convert from dollars to euros or whatever, the US would do everything in its power to assure that.