Obama Playing with Fire: U.S. Will Lose Trade War with China, Pento Says

In the September 16, 2009 article "Obama Playing with Fire: U.S. Will Lose Trade War with China, Pento Says," Peter Gorenstein reports:

President Barack Obama said on Monday he was "absolutely" certain the United States and China could avoid a trade war after slapping a 35% anti-dumping tariff on Chinese tire exports.

Let's hope he's right. The U.S. is engaging in a potentially dangerous game with our leading creditor, says Michael Pento, chief economist with Delta Global Advisors. "You never want to poke a stick in your banker's eye and that's exactly what we're doing with China." Pento is, of course, referring to China's $700 billion trove of U.S. treasuries and the $2 trillion in foreign currency reserves sitting in their banks.

Pento fears that if the tension builds and the dispute impairs trade with China, it could lead to "a dollar crisis and a bond crisis" if China retaliates by dumping our debt. "In a trade war with China there will be a dramatic change in the living standards for United States citizens and we will lose," he warns. "The Chinese will get hurt for a while but they will emerge the victors."

That won't happen according to James Altucher's latest Wall Street Journal column. "Heck, with $2 trillion sitting in their banks they have more dollars than we have. Bernanke is almost as much the Chinese Fed Chairman as much as He's the U.S. one. China cares more about the value of the US dollar than we do," he argues.

Bottom line: any escalation of tensions would potentially result in what Pento calls "mutually assured destruction." Let's hope that's enough of a deterrent.