China has threatened to crash the value of the US dollar. Here is a site to an article reporting that news: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml.

This may simply be a bargaining position, but the mere mention of China's power to wage such an economic war against the United States seems to be a very big deal. One of the newsletters I read has written about a continuing flight from the dollar and its impact on our economy. [see, The Early Warning Report "EWR" written by Richard Maybury and his web site: www.chaostan.com] Threats to the value of the already beleaguered dollar may be one reason that the Federal Reserve has not lowered interest rates. (Such a move might positively effect the real estate bust, but would increase a move out of dollars by large holders of dollars, think of China and Saudi Arabia.)

The one good thing to remember in all of this activity is that a move by China or any other foreign government to publicly dump its dollar holdings would hurt it as well, taking down the value of its own reserves. However, there has been talk of foreign governments slowly and quietly getting rid of their dollar reserves and this seems very possible. [See, The Economist, p.84 May 26, 2007 article called "The Great Wall of Money" as cited in the EWR August 2007 issue.] This is done by having that foreign government buy US assets with its dollars. This may be accomplished through a trading company or a "sovereign wealth fund" like the one China has recently established. China's sovereign wealth fund has hired Blackstone to manage the funds reported assets of 3 billion. The Wall Street Journal's June 6 edition for 2007, reports that foreign purchases of businesses in the US has increased by 76.7% in 2006 alone, as sited in EWR. This may be the method by which foreign governments are ridding themselves of their dollar reserves, by buying US assets. That also might explain why the values of hard assets in the US seem to continue to rise while it is clear that the average US consumer is having a harder time paying its gas, food and medical bills.

Mike