Beijing to bail out on the dollar?

"China has resolved to shift some of its foreign exchange reserves--now in excess of $800 billion--away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback," reported the January 10 Washington Post. The senior Chinese economist, who spoke on condition of anonymity, explained that Beijing "is inclined to shift some of its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve."

The Post report followed a January 6 article by London's Financial Times: "China indicated on Thursday [January 5] it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds--a potential shift with significant implications for global financial and commodity markets."

Neither the Post nor the Times gave proper attention to the devastating potential consequences to the U.S. economy should Beijing decide to dump the dollar. In their new book Empire of Debt: The Rise of an Epic Financial Crisis, Bill Bonner and Addison Wiggin describe the extent of our economic dependency on Beijing.

"Among the noisy headlines of 2005 was the remarkable information that China--a Third World nation--lends the United States $300 billion per year," they write. "Without Chinese support, the dollar would have already collapsed, bond yields would have soared, and the U.S. economy would already be in a recession, if not a depression.... Where does the money come from? The Chinese get the dead presidents from selling products to live Americans, who seem ready to consume anything that comes their way. First, the dollars come rolling off U.S. printing presses, then they make their way into the hands of Chinese and other manufacturers, and finally, they are returned to their birthplace as loans. China is fast becoming America's 'company store,' to whom we owe our standard of living and maybe even our soul."