The Young Turks

Why would the Chinese government be urging its citizens to dump the dollar?  It may just be that they are offering what they think is helpful economic advice, I really don't know.  The amount of money we're talking about is not really consequential.  The article says Chinese private holdings of foreign currency amount to around $162.1 billion, only a portion of which is dollars anyway, so the economic effect, while an issue, isn't what is worrisome.

The Chinese have been known to back down US government rhetoric by threatening what it sometimes refers to as "the nuclear option".  The term  refers to a state of affairs in which China would completely divest itself of investments in instruments based on the US dollar.  The use of this terminology is interesting in itself.  It underscores their awareness of just how vulnerable the US economy is to a Chinese decision to divest itself of the dollar.  It also voices their awareness that, like the use of the real nuclear option, such action would cause widespread damage to their own economy as well as ours.  There is, of course, a difference between their circumstance and ours:  They are $1.4 trillion dollars in the black, we are $9 trillion in the red.  In other words they have a $10.4 trillion dollar advantage over us in terms of their ability to absorb a shock.  Now we have a GDP about 5 times theirs and this factors into our ability to withstand losses, but it isn't a pleasant thing to contemplate.

So I wonder, are the Chinese urging their own citizens to sell the dollar to lessen collateral damage to Chinese citizens should they excercise the "nuclear option", or are they thinking about beginning a slow but steady divestment of dollars over the next few years?  If we bombed Iran, which is kind of like their Saudi Arabia, would they excercise the "nuclear option" in retaliation if we couldn't be talked down any other way?

It reminds me of a scene in the movie "Wall Street", where Gordon Gekko (Michael Douglas) screws over a character he refers to as "Sir Larry" by buying huge blocks of stock in a company that "Sir Larry" is gradually buying up in the hopes of transforming it into a profitable enterprise.  The effect of Gekko's purchases is to drive the stock prices through the roof.  He then turns around and offers to sell his large holdings back to "Sir Larry" for a much larger price than Larry would originally have had to pay.  In negotiating the price Larry warns Gekko "I could dump the stock just to burn your ass, but I want to make a go of it".  

In the right circumstances, would China dump the dollar just to "burn our ass"?  One thing is for sure, it's a sign of the decline of US economic power in the world.