China Says Don’t Worry: Foreign Reserve Couldn’t Be Used to Destroy the Dollar

China tried to allay concerns about the damage it could do if it sold the $900 billion worth of U.S. treasuries it currently holds. On Wednesday, its foreign exchange agency assured the press that China’s dollar holdings are not a “nuclear weapon” that could be used to blackmail America, and that the issue “should not be politicized.”

The statement seemed to have been in response to 2007 comments by two Beijing officials who argued that China could and should use America’s debt as a political weapon or “bargaining chip” to counter congressional calls to revalue the yuan and impose trade sanctions on Chinese goods. At the time, Chinese state media referred to the country’s stockpile of U.S. dollars as its economic “nuclear option,” capable of destroying the dollar at will.

China is America’s biggest creditor and holds over $2.5 trillion in U.S. dollar-denominated assets.

The agency said the money it had lent to America was strictly an economic investment designed to benefit the Chinese people.

Echoing earlier appeals by Chinese leaders, the agency then called on Washington to follow prudent economic policies to protect the value of Beijing’s investments. The statement also reassured investors that there was no need to worry that China was shifting out of dollars and buying gold.

China’s massive U.S. debt holdings are becoming a touchy issue. China is such an important lender to America that any confirmed evidence that China was no longer supporting the dollar, and was actually selling it, could risk setting off an unstoppable stampede in which other nations would seek to dump their holdings before China swamps the market and demand for dollars is overwhelmed.

The implications of a run on the dollar due to Chinese treasury-dumping go far beyond just the value of the greenback.

Chinese demand for treasuries is one of the primary pillars supporting the dollar’s value. When China buys treasuries, it keeps the dollar strong, interest rates low, Chinese imports inexpensive, and consumers spending. Remove that pillar, and the whole U.S. economy is thrown into jeopardy.

The Trumpet has warned not only against the danger of America relying on foreign creditors, but also that deteriorating economic conditions in general are frighteningly imminent. Even if China has not decided to dump the dollar yet, America’s massive and growing debt loads, huge trade deficit, ballooning government entitlement spending and corruption-plagued financial system based upon a precarious fiat currency mean that economic problems are not only here to stay, but will intensify.

That means that going forward, U.S. treasuries might not be such a safe investment. What will China do?

Americans should prepare to reduce their living standards.