This $17 Trillion Divorce Won’t Be a Pretty One

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: Returning from China last month, US Congressman Mark Kirk had a bearish take on a high-level visit by American officials. Treasury Secretary Timothy Geithner claimed the US’s biggest creditor voiced great confidence in its debt. Kirk, an Illinois Republican, came back with the opposite impression.

“China is beginning to cancel Congress’s credit card,” he told Fox News on June 10. It doesn’t want to lend much more money to the United States and especially is worried about the Fed’s policy of printing money to buy new debt.”A month later, there’s no doubt about whose assessment was more accurate. Chinese leaders are clearly very concerned about the dollar. How they will react is a key question hanging over markets, and it’s time to take the discussion to the next level. Everyone knows China wants to reduce its dollar holdings. Little is known about how that process may unfold and how much work and preparation needs to go into it. Lots, in fact. Think of China and the US in history’s most expensive divorce. The two economies total $17 trillion of output, and polls in China show little support for adding to almost $800 billion of US Treasuries.

This argument can be broadened to the rest of Asia. The idea that China or Japan — with $686 billion of Treasuries — can just start selling massive blocks of dollars is ridiculous. It would devastate markets the world over and the fallout would boomerang back on Asia. If you think markets are shaky now, just wait until word of a central-bank fire sale gets around.

Copycat Selling

Sure, Singapore (with $40 billion of Treasuries), India ($39 billion) or South Korea ($35 billion) could try to dump dollars on the stealth. Good luck in this highly connected, around-the-clock world. News that a key economy seeks a first- mover advantage over peers would inspire copycat selling. Expect investors and traders to respond with massive sell orders.

Warren Buffett can discreetly trim Berkshire Hathaway Inc.’s interest in a company or a currency. How a central bank divests itself of tens or hundreds of billions of dollars on the sly is another matter.