China's Economic Nuclear Option

There has been talk of China using it's economic "nuclear option" against the US, that is dumping its US dollar holdings, thus killing the value of the dollar against other currencies, as for example in this report. But this would be sort of mutually assured destruction, a MAD economic doctrine. The US would be hurt, but so would China. It would lose its best customer, the US, which would no longer be able to afford all the stuff it now imports. Plus, it would be hard for China to dispose of all of its US dollar denominated assets before the dollar started to crash; so, China would take a big loss on whatever it got caught holding as the dollar tanked. In addition, as the article points out, the US has been trying to get China to increase the value of the yuan relative to the dollar, albeit not by so much; so, China would be to some extent doing what the US wants it to do, delink the yuan from the dollar and let the yuan float up versus the dollar.

In short, this seems like something that it would be very unlikely for China to do. It would hurt the US, but at a great price for China. The only scenario might be if there was a huge financial crash in China, so that adding to it would be relatively unnoticeable; then China might say, "If I'm going down, I'll take America with me."

Impact of US Recognition of India's Nuclear Status

The Senate has passed legislation implementing the agreement reached by the Bush administration to legitimize India's nuclear program and allow nuclear cooperation. One the political side, it helps align India with US policy vis-a-vis China and possibly Iran One the non-proliferation side, it abandons the principles of the Nuclear Non-Proliferation Treaty, which should penalize countries that develop nuclear weapons capability outside the international framework. The BBC reports that while there is strong bipartisan support for the agreement, there is also strong opposition from the non-proliferation community.

In related developments, the Israeli newspaper Haaretz reports that Israel may follow India's lead and have its nuclear program legitimized by making one of its facilities open to inspectors while retaining the secrecy of another as a military facility. Meanwhile, China and Pakistan are negotiating Chinese assistance to Pakistan's nuclear program, according to the Financial Times. This would be China's balance of power move to offset America's nuclear alliance with India.