Strategic Studies Quarterly ♦ Winter 2008
[ 84 ]
Living in Interesting Times
The Economics of a Chinese Currency Attack
Jeffrey E. Haymond, Colonel, USAF
What really matters . . . is the strength of the currency. Britain has nu-
clear weapons, but the pound is weak, so everyone pushes it around.
—John F. Kennedy
Several large near-peer competitors, such as Russia and China, have
amassed large levels of dollar-denominated foreign exchange reserves. This
raises concern that these states could deliberately sell off assets to harm the
dollar’s value. Currency attacks have historically been a part of warfare,
and the recent advent of nation-states that have large reserves suggests it
is possible the United States could face this threat. Contemporary public
discussion has often lacked depth and been at one of two extremes: either
(1) China could destroy the United States if it chose to sell off its treasuries,
or (2) the Chinese would lose so much they would never undertake a
currency attack. This article takes a detailed look at China’s economy to
determine the plausibility of a currency attack against the United States.
There are many conflating economic issues surrounding a currency at-
tack, such as the perceived overvaluation of the dollar and its status as the
world’s primary reserve currency. The analysis herein suggests that large
dollar reserves are sufficient to enable a currency attack, independent of
the valuation of the dollar or its status as the world’s reserve currency. The
economic reasons for China to hold large foreign exchange reserves are
central to our conclusions; these are found to be independent of any mali-
cious intent towards the US dollar.
A currency attack on the dollar is plausible, with possible devastating
effects if not effectively countered. However, an attack is extremely improb-
able due to the costs an attacker would face and can be effectively countered
Col Jeffrey E. Haymond is currently vice-commander of the Space Development Test Wing at Kirtland
AFB, New M