For over a decade, China’s export-driven economy has paved the way for enormous economic growth. By pegging their currency lower than the dollar and taking full advantage of 130 million migrant workers slaving away in sweat shop conditions, their competitive edge in manufacturing has been untouchable. They even went a step further to stimulate demand for their exports by becoming the largest holder of U.S. treasuries as well as Fannie Mae and Freddie Mac debt. The criminal masterminds were set to become the next superpower. I mean, what could possibly go wrong with funding one of the largest credit booms in history through slave labor and currency manipulation?

Meanwhile, U.S. politicians ignored the currency manipulation, human rights violations, and pollution and enjoyed the supposed “prosperity” it all provided. The Federal Reserve continued to inflate the economy while China kept goods cheap and credit even cheaper. Just when it all seemed to be unsustainable and started to burst, financial innovation came through to turn our hot potato economy the dawning of a new era. Housing prices rose and the resulting debt was just packaged up and sold off to anyone naïve enough to buy into it. The game of hide the sausage was on. From the (formerly) oil rich Middle Eastern countries to China to government pension funds, the willful ignorance continued.

Now the game is up. What’s left is unsustainable debt and interest rates at an all time low. As it turns out, being the largest holder of U.S. Treasuries at that moment wasn’t such a good idea after all. Bond prices only have one way to go. Then you consider that China’s exports declined 17% in the past year. Apparently, relying on other countries to drive nearly half of economic growth wasn’t that bright either. Top it all off with 20 million of those sweat shop citizens now being unemployed, and you have one dangerous situation that is just starting to develop.

At this point, everyone is a loser and an idiot. So it’s time for a new fool’s game: beggar thy neighbor. The goal this time is not unlike the last. The country that devalues its currency the fastest wins the race of inevitability. Argentina and Iceland are all-stars at this one. Japan? Not so much. The U.S. and China started off in a dead heat with equally destructive spending efforts. Then President Obama kicked it into overdrive in his very first week on the team by accusing China of currency manipulation. If he chooses to make that accusation formally, it would force China to let the Remnibi rise against the dollar and erode their export base. It would also drastically reduce, if not prevent them, from purchasing U.S. treasuries. What better way to destroy your currency the fastest than to tell your largest creditor to fuck off. Let’s take a look at the response from Chinese officials:

Yu said China has no plans to channel its reserves toward stimulating its own economy because its trade surplus is sufficient to fund any import needs. China’s trade surplus was $39 billion in January.

China “should diversify its reserves away from U.S. Treasuries if the value of China’s foreign-exchange reserves is in danger of being inflated away by the U.S. government’s pump-priming,” he said.

He goes on to say:

China can also use this opportunity to get a promise from the U.S. not to make inappropriate requests on bilateral trade and the Chinese yuan,” Lu said. “We can’t afford more yuan appreciation as the economy is facing a serious slowdown.

So let me get this straight. China doesn’t want their currency to appreciate or it will collapse their economy. So in retaliation, they threaten to stop purchasing treasuries, which will crash the dollar and cause their currency to appreciate. Someone seems to be forgetting the rules of beggar thy neighbor. At this point, it’s safe to rule out evil genius status and call them what they still are: Our bitch. Some might say “but what happens when they become a consumer based economy!” Sorry, but slaves don’t make good consumers and consumers don’t always make good slaves. “Here’s 2 acres and a mule. Buy a pair of jeans” will not work. The old adage says that when the U.S. sneezes, the rest of the world catches a cold.  Soon we we will find out that when the U.S. catches a cold, China riots.

The U.S. on the other hand, needs increased savings to pay off debt, yet we continue to encourage more debt and prop up inflated assets. The Consumer of Last Resort, aka congress, is trying to pick up the slack. If they succeed, inflation will be a big problem. If they fail, we experience a prolonged deflationary depression. Welcome to Economic Zugzwang.

The famous Austrian economist, Ludwig von Mises, once said, “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” Regardless of which path we choose, a collapse is coming. And when it does, our debt will no longer be backed by the full faith and credit of the United States government. It will be backed by 10,000 nuclear missiles.