Question: why is US trying to postpone what appears to be inevitable? Stalling while trying to figure out options? Normal politics: stay afloat? Something else?

What is their option B? What are the mid-game scenarios?

Ah, yes, the perfect time to insert one of Josef Stalin’s brilliancies into the mix it would seem. Reflect on this remark and relate it to the reality of Obama’s recent “peace offensive” if you will:

“If any foreign minister begins to defend to the death a “peace conference,” you can be sure his government has already placed its orders for new battleships and airplanes” … J. Stalin

Time to remove the rose colored glasses, perhaps?

When I was growing up China, like the USSR, was considered an anti-democratic evil communist regime bent on a “conspiracy to sap and impurify all of our precious bodily fluids”. They were considered the evil to end all evils and via the “domino theory” would consume our nation if we didn’t vigilantly protect against them.

Now despite the fact that as far as I can tell little has changed in their governing style, they are a “preferential trade partner”.

So, what did change? Did they suddenly become a bastion of human rights? No. Did they suddenly allow freedom of press? No. Did they suddenly embrace democracy in any of its forms? No. Did they disavow communism and repent their evil ways? Not even close.

What did they do then???

They opened up to capitalism.

So what does that really say about the whole “red scare” we grew up with? What does it say about the dangers of communism?

It says it was all about money. It was all about property rights and government control of business. Once China allowed privatization, all was good again.

So much for the “evils” of communism.

And that of course is why Chavez is evil and Hu Jintao’s name doesn’t even come up. Chavez is for deprivatization and Hu is allowing privitization.

In short, it never was about freedom, or democracy, or human rights. It was about the profits of major American corporations, and China if anything today has only accelerated them. Chavez could massacre a 100,000 people tomorrow and be our best friend if only he would re-privatize Venezuela’s oil fields.

But they know how to manipulate us and in an Orwellian way those things that actually would benefit us are seen as bad and those things that hurt us are seen as good.

In any case, I don’t see China as evil, though certainly they do evil things (we as well), however I think it brings truth to the lie we grew up with. It wasn’t about communism (though I’m not saying it shouldn’t have been), it was about money.

And you expect us to believe that?

You write:

“They keep currency controls for a number of reasons but perhaps the most important one is to rationing foreign exchange in accordance with their “priorities””

You mean, China wanted to suppress domestic consumption in order to enforce investment in “priority” industries (which had state-chartered semi-monopolies)?

Hmm, where have we heard that before?

http://en.wikipedia.org/wiki/Mercantilism

But your conclusions – that the US is like Argentina, and what happened there is likely to happen here, is faulty. The missing element is foreign-denominated debt, and until the US starts selling T-Bills in Euros, I’m not going to worry about HYPER inflation (e.g. 50%+ inflation PER MONTH).

You state that Argentina entered hyperinflation because it lost access to international financing…

Argentina lost access to foreign currency debt markets because it DEFAULTED ON ITS FOREIGN-CURRENCY DENOMINATED DEBT in 1982…

Here’s a nice summary, and you can google a hundred others. You can argue that the 89 hyperinflation was mostly domestic, but the trigger events – 82 – started due to the currency markets and non-peso debt.

http://iadb.org/res/laresnetwork/files/pr250finaldraft.pdf

On specific points:

1) The time deposits you were referring to were denominated in dollars, or actually held in dollars, and were forcibly converted _because_ the central bank needed to acquire foreign currency. Why?

2) Because the peso was artificially pegged to the dollar, and was substantially overvalued for a decade. The forced conversion constituted an effective “taking” of money from time-depositors to generate foreign currency (largely to cover foreign currency obligations).

3) The 1977-82 period is frequently referred to as the beginning of the DEBT crisis – Argentina deregulated its finance industry (sound familiar?), cut tariffs to lower import prices (sound familiar?), and ran deficits to finance its dollar/peso peg. It largely financed this deficit through FOREIGN BANK DEBT in non-peso currency, precisely because the deficit was not to support domestic production but rather to support the subsidized acquisition of foreign currency (by both private and public Argentinian actors).

4) The beginning of the large deficits was 77/78, hyperinflation didn’t begin till summer of 82. Almost all inflation begins because of government financing deficits with new money – I never contested this – but the HYPER inflation started because of a need to finance its dollar obligations and an inability to sustain these obligations through domestic sources.

And THAT is the foreign currency debt trap. If debt is denominated only in local currency, then inflation is somewhat self-limiting. Inflation jumps, existing debt is largely devalued, and interest rates spike… The government cannot get access to financing (no one trusts it not to print money), until it offers some real commitment to not inflate (either that, or it uses martial law).

So it turns to foreign currency lenders… (since it can’t inflate foreign currency), but this commits it to acquiring foreign currency at any price to repay the debt. But in 1982, ARGENTINA DEFAULTED because it could not raise enough foreign currency to cover existing debt payments. And that de-anchored everything.

And yet the trade conflict between the USA and China–really, between China and the rest of the world–is so great that it seems likely to lead to war somewhere.

We could denominate our US Treasury bonds sold to Chinese investors in Chinese currency (renmimbi).

This would eliminate Chinese concerns re reserve value protection whilst enabling US borrowings to continue as required for trade balancing.

Does this give any party a problem?

Agricultural commodity prices will actually shoot up much more than oil prices as they are usually the first ones to respond to currency depreciation. If you remember, US farmers were doing quite well in early 2008. The ones who’ll suffer will be those 3rd world nations which are dependent on food imports.

Then, the US is a not-so-small oil producer and has sizable oil inventories. The US transporters can pass on the increased fuel costs to the final consumer faster and with less pain than what will happen in Europe, Japan and China who’ll suffer most from the ‘oil price shock’ as the US$ will depreciate much less against currencies than commodities, which are stil traded in US$.

I think it’s clear from the above analysis that after the devaluation is done, very few powers in the world would be willing to rock the boat, but instead will have to work out damage control measures.

When the Chinese or Russians talk of a new international reserve currency, or regional reserve currencies, or trade in Yuans, I don’t think they really mean it. All fiat currencies are basically a sort of ‘US$ derivatives’ at this time in history, they aren’t going anywhere if the US$ leaves the scene. When you have no gold standard – which is not coming back – any new reserve currency regime will take many years to be agreed on, and we’ll need extensive written regulations on a global scale to prevent currency manipulation and ‘currency wars’.

So why they are talking what they are talking is that they are buying time to protect assets and control damage – at the expense of anyone else. You might notice that Russians are actually shouting louder than the Chinese about ‘regional reserve currencies’. That’s not a sign of strength or vision. It’s merely a reflection of their panicky mood as they will remain heavy net US$ assets sellers in years ahead, trying to finance their enormous (and enormously non-productive) budget deficits.

But I personally think the powers that be in the US will fear to go the FDR way because they are delusional enough to expect the consumer to ‘recover’ soon, and thus think such overnight devaluation will do too much damage as salaries will respond much slower than living cost. However these brave deflation fighters will be disappointed. The credit crisis is still with us, deflation is a wicked enemy, and it’s coming back soon because it took them too long to win their first battle; small/medium businesses which provide so much employment are too deep underwater already.

And as they respond with more ‘stimulus’, the game they are playing wil become increasingly dangerous because they can’t support the bond market and the US$ at the same time. The US$ will have to drop dead because if interest rate volatility is allowed to set in, it will kill the interest rate swap (IRS) market. IRS’ form the bulk of the US banking cartel’s derivartive exposure. We’ll then all be amazed how we could get scared to death by smth as insignificant as the MBS market collpase in ’08..

The American “strategy” has unravelled, badly. If you think the Chinese are worried, think again.

With all respect to you personally, if the United States continues with its efforts to encircle Iran and Russia with hostile NATO forces and, through one AIPAC Stephin Fetchit or other, ratchet up the war threats over Iran’s assertions of its rights to nuclear power, China, whose interests in Iranian energy are rather considerable, will move more palpably toward the creation of a formal anti-American bloc. Remember, now, American foreign policy isn’t being conducted by Americans who see themselves as in any way free to pursue purely American interests, but rather by those under the watchful eye and coercive threats of the Israel Lobby. So before you can say Avigdor Leiberman, you just might find yourself in yet another proxy war, this time with real adversaries. I’d say that’s almost certainly going to happen inside of five years what with the beholdenness of the Obama/Biden/Clinton entourage to these foreign interests. If it were up to Biden, we’d launch an attack on Russia from Georgia and another on Iran from Afghanistan, Iraq and the Persian Gulf today. China is not likely to stand idly by while the United States takes on an increasingly ominous military presence in all too many of the worlds’ hot spots. We have the Korean experience with which to refer.