The New Sleeping Giant

While we've been messing around with a strategically unsound war in Iraq and leveraging low interest rates to create a house-of-cards economy driven by consumption rather than production, China has quietly set about building up its strength and influence.

This morning I read about how China is undergoing a military expansion that we now consider "excessive." Although I'm sure it's been happening for a while, the alarm bells rang loud and clear when a Chinese sub stalked a U.S. Naval fleet undetected until it surfaced some 5 miles away. Was China sending a message?

I had a similar thought last week when China signaled, again, that it's planning to diversify its currency holdings away from the dollar (immediately sending the dollar into a nosedive until they softened their statement). China has been buying our debt for some time, sustaining the value of the dollar in order to enable us to buy lots of their cheap stuff. If China decreases the amount of U.S. debt its willing to hold, the value of the dollar will decrease and the remarkably low interest rates that have been fueling our economy will begin to increase. So far, China has not been willing to sacrifice the benefit they receive from our consumerism for the benefit they'd receive from a diversified currency portfolio -- which is good for us. The scary part is that the health of our economy has become so dependent on China's good will... and their good will is only going to last so long as they need us more than we need them. You can read more musings on this topic here and here.

A weaker dollar would be good for the global competitiveness of the U.S. labor market, which I suppose could be a matter of bitter medicine (wages go down, standard of living goes down, more work stays in the U.S.). I have to wonder, though, about the greater impact to our consumer driven economy and whether or not an increase in global competitiveness would be enough to sustain our "new economy" if nobody's buying anything anymore.