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China, Russia Will Hold First War Games

Dec 13, 11:27 AM (ET)

BEIJING (AP) - China and Russia will hold their first joint military exercise next year, the Chinese government said Monday, as President Hu Jintao called for an expansion of the rapidly growing alliance between the former Cold War rivals.
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"We want ... to promote the development of the two countries' strategic collaborative relationship in order to safeguard and promote regional and world peace," CNS quoted Hu as telling Ivanov.

Beijing and Moscow have built up military and political ties since the Soviet collapse in 1991, driven in part by joint desire to counterbalance U.S. global dominance.
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The agreement was signed during an October trip to Beijing by Russian President Vladimir Putin, who said relations had reached "unparalleled heights." That visit also produced a pact to jointly develop Russian energy resources - an urgent issue for Beijing, which is trying to avert fuel shortages in its booming economy.
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China has become the Russian arms industry's No. 1 customer, and is expected to buy $2 billion in weapons this year.

Russia is a key supplier for the Chinese military's effort to modernize its arsenal and back up frequent threats to invade Taiwan, the self-ruled island that Beijing claims as its territory.

Just the next move on the Grand Chessboard.

Also in the news, China Relents, and Promises Textile Tariffs

HONG KONG, Monday, Dec. 13 - The Commerce Ministry in China announced Sunday night that it would impose tariffs on some textile exports, a step that could avert a trade war with the United States and the European Union over a new influx of low-cost Chinese garments that had appeared likely to flood Western markets starting Jan. 1.
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The Chinese decision to impose export tariffs under Western pressure will mean that American and European shoppers are less likely to see lower price tags on an influx of everything from underwear to Chinese-made Armani ties. But for seamstresses in North Carolina and in dozens of developing countries that compete with China, the decision announced Sunday could mean a reprieve from fiercer competition and possible unemployment.
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The Bush administration signaled again over the weekend its intention to limit Chinese shipments if China did not do so, by announcing that shipments this month in excess of quotas for 2004 would not be allowed into the United States in January, and would only be allowed to trickle in thereafter.

What's not really said is that China, as Murka's 2nd largest creditor, has Murka by the balls.

Rumors that China's central bank has reduced its holdings of US Treasuries in favor of European assets is putting more pressure on the already battered US dollar. After closing at US $1.274 in October, the price of the Euro in US dollar terms shot up to around US $1.33 on Friday November 26. According to the Shanghai-based China Business News, China has cut the size of its US Treasury Bonds holdings to $180 billion.
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The possibility that the Chinese authorities may lower their holdings of US assets and substitute them for European assets is seen as a major threat to the US dollar and seems to support the view of most experts. For instance, in his speech on Friday November 19 the Chairman of the Federal Reserve Alan Greenspan suggested that foreigners might get tired of financing the ever-growing US current account deficit...
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At some stage, Greenspan maintains, foreigners will start shifting their money away from US assets thereby depressing the US dollars and lifting the interest rate structure. This in turn will undermine the pace of US economic activity, so it is argued. According to this way of thinking, as long as the US continues to run a massive current account deficit the pressure on the dollar and on the US economy will stay intact. Hence the only solution to this predicament is to devise policies that can tackle the problem of the growing deficit.

As we've seen, BushCo has zero interest in this.

Seems economists are looking in crystal balls, trying to figure out what all this means. Here's a fairly reasoned, low-key assessment of what to expect:

The U. S. Government is running bigger and bigger fiscal deficits. American consumers are addicted to consumption. And neither group saves enough to finance domestic investment. If the US were to shut up trade with China, it would have to call on other nations to finance its steadily growing current account deficit...However, a duty on Chinese imports is not only a tax on Americans but also an impediment to Chinese exports to which China is likely to retaliate. And it can do so on two fronts. China is the second largest buyer of U.S. Treasury bonds. Should it decide to dump its vast holdings of bonds, it could put serious pressure on U.S. interest rates, and hurts the U.S. recovery, and it could also retaliate with sanctions of its own against US exports.

There is another important aspect of this debate to consider. A reevaluation of the renminbi is a devaluation of the dollar. As foreigners are significant buyers of U. S. assets and equities, such a devaluation could discourage foreign investors from financing the US current account deficit, and that would put pressure on US's interest rates, consumer prices, and unemployment.

Here, for comparison, is a fairly reasoned, hi-key assessment:

Economic 'Armageddon' predicted

In a nutshell, Roach's [Stephen Roach, the chief economist at investment banking giant Morgan Stanley] argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants.

The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.
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Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible.

Smart people downtown agree with much of the analysis. It is undeniable that America is living in a "debt bubble" of record proportions.

What does this all mean? Start getting used to eating rice...

Thanks to Operative Sugar for the tip.

Here's a refresher on some earlier moves on the Grand Chessboard for those who want it.