Tuesday, March 1, 2011

Economic Terrorism?

I'm at a loss in trying to understand how people like Kevin Freeman have real, economic / financial jobs and appear to have no understanding of basic economics or finance.

In a report to the Pentagon, Freeman states that the Chinese are the likely culprits in a financial terrorist attack against the US (and, along with jihadists, could be the ones to blame for the 2008 financial crisis which was clearly not the result of banksters siphoning money out of the US financial system directly into their own pockets).

I have to wonder how it's possible that he doesn't understand that China's own economic self-interest is tied to America's economic success? In short, what advantage do they (or did they) gain by destroying the US economy? It's the underpants gnome theory of financial terrorism:

1.) China destroys US financial system
2.) ???
3.) Profit!

Secondly, Freeman claims that phase three of this diabolical terrorist plot will involve countries dumping US bonds to devalue the dollar which will further accelerate our decline. But, um... why would China want to do this? China owns nearly two trillion dollars worth of US government bonds (basically they hold two trillion dollars worth of US dollars). So if they start dumping their dollar holdings then the dollar holdings they currently have will further be devalued and they'll end up completely ruining their own balance sheet.

Now then, I can see how Freeman might believe a domino effect is possible because if China started dumping their dollar holdings every other government that's currently holding dollars would do the same because none of them would want to get stuck holding a ton of worthless dollars (this is the same mechanism behind panic selling in financial and stock markets). However, even that isn't a threat to the United States as a devalued dollar at this point might help US exports regain competitiveness.

But if this prophecy does come to fruition and the dollar does crash and inflation becomes a severe problem then we can deal with that. Raising interest rates and tightening the money supply are very effective tools for fighting inflation which Paul Volcker proved in the early '80s. Inflation is a much less severe problem and one much easier to fight than deflation, no matter how much conservatives and conspiracy theorist nuts with real jobs that have influence over government policy (like Kevin Freeman) insist that inflation is the greatest threat to mankind.

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