by Peter Schiff, Schiff Gold:

Last week, Pres. Trump said US markets might have to endure some short-term pain if the trade war with China escalates. But never fear, in the long run, everything will be great!

We have to do things that other people wouldn’t do. So, we may take a hit, but you know what, ultimately, we’re going to be much stronger for it.”

Peter Schiff agreed there is going to be short-term pain. And we’re also going to suffer some long-term pain.

Peter wasn’t focusing so much on the trade war, but a scenario certainly exists where Chinese retaliation could lead to some serious long-term pain for the US economy. It could pull out the ace up its sleeve.

The Chinese can’t out-tariff Trump. The US imports far more products than the Chinese. In other words, there is a lot more stuff coming into the US from China than vice versa. Emerging markets economist Alex Wolf told CNN if China “were to try and respond in kind, there would not be enough US goods to tariff.”

But that doesn’t leave the Chinese without weapons. It could target education and tourism. In fact, the Chinese have a history of using tourism as an economic weapon. That would certainly hurt the US. It could also crack down on US companies operating in the country through selective enforcement of regulations. During a period of high tensions with South Korea, Chinese officials closed down dozens of stores belonging to Lotte, a South Korean company, and the sale of Hyundai and Kia plunged due to a national PR campaign the government ran.

But beyond that, the Chinese have an ace up their sleeve. They could start dumping US Treasuries.

And there are a lot of Treasuries to dump.

China holds more US debt than any other country. It currently owns about $1.2 trillion in US Treasuries. If China started dumping all of the debt on the market, interest rates would soar and the dollar would plunge. That’s not a good scenario for a country that just cut taxes while trying to finance millions of dollars in new spending.

A lot of pundits call this a nuclear option. It would be a disaster for the US economy. But it also comes with a significant amount of risk for the Chinese. As CNN put it, “A fire sale would also hit the value of China’s Treasury holdings and may even end up destabilizing China’s currency against the dollar.” Most analysts don’t think China would go to that extreme.

But the Chinese don’t have to hold a fire sale to hurt the US. They don’t necessarily have to sell at all. China could just slow down its purchase of Treasuries, or stop buying altogether. In fact, reports came out earlier this year China was considering doing just that.

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