Dr. Susmit Kumar, Ph.D.

Rather than paying any money towards its principal, which is right now more than $19 trillion, the US has been accumulating additional debt of anywhere from $300 billion to $500 billion each year. While describing the US debt, Niall Ferguson, Laurence A. Tisch Professor of History at Harvard University said, ("In China’s Orbit", Niall Ferguson, December 1, 2010)

“With a debt-to-revenue ratio of 312 percent, Greece is in dire straits till now. However, the debt-to-revenue ratio of the United States is 358 percent, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9 percent of federal tax revenues to 20 percent in 2020, 36 percent in 2030, and 58 percent in 2040. Only America’s “exorbitant privilege” of being able to print the world's premier reserve currency gives it breathing space. But this very privilege is under mounting attack from the Chinese government.

If a person or a firm is not able to pay his or her yearly expenses, and only increasing their debt year after year, banks will certainly stop providing loans. Then again, the US Treasury Debt has one of the highest ratings from world renowned credit agencies such as S&P, Fitch and Moody’s.

There is more to this story. Under pressure from the US government, these credit rating agencies are being forced to rate the US Treasury Debt high otherwise they would face a barrage of legal cases from the US government (read my article: Credit Rating Agencies and US Rating).

The US is the Titanic of the present time and age, due to go down sooner than later (please read my article: Credit Rating Agencies and US Rating). The US is a bankrupt country surviving simply by printing its currency that happens to be the global currency (read my article The US Dollar – A Ponzi Scheme), to pay for its twin deficits – budget and trade deficits. It is up to China to decide when it would pull the carpet underneath the US dollar, causing the entire US economy to collapse (read my article: Chinese yuan replacing US dollar as global currency: A not so distant prospect).

On the other hand, kindly consider the following facts and decide for yourself whether China should care for US Credit Rating agencies:

(1)   2009 Pentagon’s Economic Warfare:

In March 2009, the Pentagon for the first time held a series of economic war games exercises. The soldiers were Wall Street traders and executives, economists, and academics – all were Americans. Wall Street bankers were flown in from Manhattan to a bunker at the Applied Physics Laboratory in Maryland for the two-day event. They were assembled in the Warfare Analysis Laboratory, surrounded by uniformed officers of the highest levels in the Pentagon, facing a dizzying array of screens normally used to simulate nuclear world war. Only this time the weapons were stocks, bonds, and currencies. The group was split into five teams: America, Russia, China, Pacific Rim, and a "grey team", representing shady outfits such as terrorist organizations. They were sent into "bunker rooms" and told to use financial or economic tools - currency, debt, stocks, gold - to bring their enemies to their knees. Everything was conducted via computer, and they could be as devious and ruthless as they liked.

The teams were presented with different scenarios—North Korea is imploding, a major global economy is melting down—and told to do what was in their best interests. The intelligence experts watched as the economic conflicts played out (“Pentagon prepares for economic warfare,” Helen Rumbelow, The Australian, August 20, 2011; “China’s giant economic sway,” Eric J. Weiner, Los Angeles Times, October 6, 2010).

What the exercises showed was that the United States consistently lost to China in economic warfare. The chief reason for it was that China could inflict real pain on the United States without having to face repercussions at home. For instance, by simply moving the maturities of some of its $850 billion in Treasury holdings from ninety days to sixty days, it would cause chaos in the US stock markets. Or China could sell just a trickle of its US financial assets thus signaling that it didn't have confidence in the US economy, setting off a panic.

At the end of that Pentagon session, the 80-odd players returned from their bunkers and assessed the damage. China won, without so much as reaching for a gun. ((“Pentagon prepares for economic warfare,” Helen Rumbelow, The Australian, August 20, 2011; “China’s giant economic sway,” Eric J. Weiner, Los Angeles Times, October 6, 2010).

(2)   In a Dacade or so you may need Yuan and not US Dollar throughout the entire African Continent and in several other countries as well:

In the last ten years China has replaced the US as the world’s chosen trading partner. For an example, China has become the number one trading partner of the entire Africa continent and most major countries. It is using its currency yuan, instead of the US dollar, as the mode of transaction with its trading partners. In 2009, only 1% of Chinese trade was in yuan whereas in 2014, 19% of Chinese trade was in yuan. As per HSBC CEO, more than 50% of Chinese trade would be in yuan by 2020. (“Half of China's total trade to be settled in yuan by 2020 - HSBC CEO,” Michelle Chen and Eric Meijer, Reuters, March 26, 2015). Right now, you can use dollar in Uganda (just for an example sake) and they will not accept Chinese Yuan. But once China starts to use its Yuan in trade with the entire Africa, you may not be able to use US dollar at all. In the next few years, yuan is going to replace the US dollar as the mode of transaction in global trade.

(3)   Richard Haass’ (President of US Thinktank ‘Council on Foreign Relations’) Statement about Dollar’s Demise :

Describing the stranglehold of China over the US economy, Richard Haass, President on Council on Foreign Relations, a premier US think tank, said (“Don't be distracted by Greece: Americans must also face financial facts,” The Telegraph (UK), Justin Webb, June 25, 2011),

“Essentially the U.S. took advantage of Britain’s Sterling problem to exercise economic leverage over the British government, and that led to a hasty retreat in the 1956 Suez War (despite defeating the primitive Egyptian army on all the fronts, the invading forces had to withdraw). So one can imagine a situation nowadays, where, say, there is a crisis over Taiwan between the U.S. and China—which holds a significant number of dollars—and one can imagine the Chinese might be prepared to threaten the dollar, make some comments to weaken it unless the U.S. backs off some of its support of Taiwan.”

The 1956 Suez War is also called “Suez fiasco” which caused the United Kingdom and France to lose their superpower status.

(4)   Lawrence Summers’ Statement about the Asian Infrastructure Investment Bank:

After all, the Western countries, except the US, Japan and Canada, recently joined the China-led Asian Infrastructure Investment Bank, Lawrence Summers, a noted US economist, ex-President of Harvard University, and the Treasury Secretary during Bill Clinton administration, said, (" A global wake-up call for the U.S?," Larry Summers, Washington Post, April 5, 2015)

“This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the United States before and multiple times when U.S. behavior was hardly multilateralist, such as the 1971 Nixon shock ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.”

Additional information