《CHINADAILY》版面链接http://www.chinadaily.com.cn/opinion/2010-11/10/content_11525847.htm

The key purpose of all wars is to plunder wealth. Compared with traditional wars, a currency war seems more "civilized" because it is wealth-plundering without bloodshed.

By virtue of being the most developed country and its currency being the world's monetary reserve, the United States occupies high ground in the global financial market. That gives it the advantage to start a currency war without suffering much loss. The only way to stop a war, therefore, is to make the US realize that the losses it would incur by starting a currency war will far outstrip the gains. And the best way of doing that is to make other countries stick together.

But the US has used the differing orientations of other countries to ride over them one by one.

At the World Knowledge Forum in Seoul, South Korea, on Oct 13, 2010, Nobel Prize-winning economist Paul R. Krugman and Harvard University's Niall Ferguson initiated a debate on "whether or not the US Treasury bond market can withstand China's selling". Ferguson said the aim of the second round of the Federal Reserve's (Fed) currency printing plan is monetization of debt on a much larger scale, maybe up to $1 trillion. But the real worry is that investors in US Treasury bonds may lose confidence in national debt and start selling them.

Krugman, on the hand, said the aim of the plan is to force those saving for the future to consume more in the present to stimulate economic recovery, and those who don't do so will see the erosion of their wealth.

The financial debt is not a problem for the US, Krugman said. The US is not worried whether China will sell the US Treasury bonds it holds, for the Fed can buy them back. Ferguson, however, expressed concern over the possible selling of US Treasury bonds.

Who is right, Krugman or Ferguson? And why is the US implementing a second round of quantitative easing monetary policy when it knows it will hurt the global foreign exchange market?

The main reason is that the US' credit expansion stopped. Since the global financial crisis broke out, a loss of $13 trillion for the heavily indebted US consumers and enterprises, and the decline in real income because of the about 10 percent unemployment rate prompted the government to stimulate savings, reduce consumption and repay debts. In 2009 alone, the debts of the US private sector reached $1.8 trillion.

If we assume the US economy to be a huge water mill, its credit expansion is the flow of water. Once the flow of water stops or even slows down, the water mill, that is the economy, will stop moving.

Once the private sector's credit expansion stopped, panic spread among US economists, including Fed Chairman Ben Bernanke, who had studied the Great Depression of the 1930s minutely and was determined not to let the "horrible" deflation recur. Bernanke has always believed that on the slightest sign of deflation the Fed has to "borrow, print and spend money" or even throw it from helicopters to stimulate consumption.

After a credit crunch hit the US, the federal and local governments' liabilities began soaring, reaching $1.8 trillion. Why? Because the US government borrowed, printed and spent money to prevent the national economy from shrinking.

Most of the government's credit expansion measures have not been able to boost the country's economic recovery, and government debts have failed to effectively restart the private sector's credit expansion. And that's the reason why the Fed has decided on the second round of its money printing plan.

During the Fed's debt monetization process, the economy will get another injection for credit expansion. This time, it is Treasury bonds that will probably go through extensive monetization.

It seems Krugman is closer to the truth. Since the Fed is determined to print $1 trillion to buy back its Treasury bonds, the US' bond market will not suffer much if China indeed sells some of the bonds it holds. But Ferguson's statement reflects the situation in the long run: About half of the Treasury bonds' financing is dependent on overseas investment. As one of the biggest buyers of the bonds and with almost one-third of world's foreign exchange reserves, China has the capital strength and potential energy to influence investment in US bonds. In emergency situations, its actions, or even suggestions, could cause a chain reaction leading to a disaster in the bond market.

By June 2009, the US federal government's total liabilities had crossed $13 trillion. Treasury bonds add up to 90 percent of the country's GDP, and if they increase to 150 percent the US would face hyperinflation. A US Treasury Department report submitted to Congress suggested that by 2015, the value of Treasury bonds would increase to $19.6 trillion.

If the US wants to increase its Treasury bonds' value by $6.6 trillion in the next five years, about half the money for that has to come from foreign investors. And a substantial percentage of that has to come from China, which already holds one-third of the world's foreign exchange reserves.

So, even if China does not sell the Treasury bonds it holds but stops buying more, the Fed has to order a third or even fourth round of money-printing. The second round of the Fed's money printing plan has already sent shock waves through the global foreign exchange market and created currency wars among some countries, so people can imagine what the situation would be like if the Fed decided to print more money. If that were to happen would any country dare to hold US dollar assets?

There is a reverse relationship of creditor and debtor between China and the US: The biggest debtor lists a series of strict requirements for its biggest creditor and threatens it with penalties.

It is the lack of will to use its power, rather than not having enough power that has led the creditor into a passive position. But the debtor does not realize that. Maybe this is the time for the creditor to use its power.

The author has a book, Currency War, to his credit.