Calling Our Bluff
Both Iran and China are taking the Labor Day Weekend to call our bluff. Iranian President Mahmoud Ahmadinejad, buoyed, no doubt, by his electoral victory has said that discussion of Iran’s nuclear development program is already finished:
TEHRAN (Reuters) – Iran’s president snubbed on Monday U.S. President Barack Obama’s end-September deadline to talk to world powers on its disputed nuclear program, saying in his opinion discussion on the issue is “finished.”
Mahmoud Ahmadinejad said the Islamic Republic was ready for dialogue on “challenges” facing the world but made clear Tehran would not back down in a dispute over atomic activities which the West fears are aimed at making bombs.
“From our view point (discussion of) our nuclear issue is finished … we will never negotiate on the Iranian nation’s obvious rights,” he told his first news conference since he was sworn into office following a disputed re-election in June.
and the Chinese have expressed concern about the rate at which our Treasury is borrowing:
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”.
“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.
The two situations are very different but each presents a challenge to the Obama Administration in its own way.
A keystone of the Obama Administration’s foreign policy has been a stated eagerness to negotiate. What if your correspondent isn’t interested in negotiating? In this case the challenge for President Obama is what next? Neither Russia nor China is likely to support additional sanctions on Iran but neither country may be willing to veto possible Security Council sanctions, either.
If the Chinese decide to diversify and put their new foreign reserves into gold or other currencies, the risk they’re running is probably higher than the additional risk they’ll impose on us. While the Chinese have been a factor in the U. S. Treasury’s continued ability to borrow, they haven’t been the only factor. If they flee from our Treasuries, they run the risk of ruining themselves by devaluing their own reserves. However, if they reduce their purchase of Treasuries cautiously, it could increase our cost of borrowing but it will also reduce their importance for us.
This in turn could have a number of implications. The beginning of the asset inflation that put us in the economic fix we’re in now can largely be dated to China’s establishing a de facto peg of the yuan to the dollar. And the reason that the Chinese began the practice was the problems they’d had in managing their own currency.