It is amazing how many people still think the United States can force its economic policies on the rest of the world. Yes, there was a time when it could—just like there was a time when America was the world’s creditor. But those days are fading into history.

On Tuesday, Senator Joe Lieberman warned Chinese lawmakers that if China didn’t start making its currency appreciate faster, American lawmakers would pursue “currency manipulation” charges before the International Monetary Fund. The Senate has already passed a bill that could lead to trade sanctions against Chinese businesses.

For the record, every country in the world engages in currency manipulation. Countries commonly adjust, or attempt to adjust, their currency’s value against other foreign currencies by manipulating interest rates, increasing or decreasing foreign exchange reserves, expanding or contracting the money supply, and by other means. The U.S. adjusts the dollar’s value using these same methods.

The problem in this case is that China, unlike Europe and the rest of the Western world, has refused to let the dollar fall against its currency. Instead, Beijing has opted to keep the yuan’s value relatively pegged to the dollar, allowing it to rise by only 9 percent over the past two years, although some economists say its value should be much higher.

This is a problem for America, because the U.S. carries a huge trade deficit. Against China alone, it was a whopping $27 billion in June. America loses thousands of jobs to outsourcing and hundreds of billions of dollars per year because of the trade imbalance.

Some lawmakers feel that American businesses would be more competitive globally if the dollar’s international value depreciated. A cheaper dollar would make American exports relatively less expensive, and would reduce labor costs in the U.S. compared to other countries. Thus America would sell more goods to its trade partners, and the trade deficit would diminish.

In Beijing’s case, American politicians contend that Americans are purchasing more Chinese goods because Chinese products are unfairly cheaper than American-made goods, thanks to an undervalued yuan.

But China does not want to give up its undervalued currency. Chinese manufacturers are pumping out exports to the U.S. and the rest of the world, and consequently Beijing’s coffers are overflowing with dollars.

Chinese politicians realize their strength.

According to the Telegraph, in response to American pressure, the Chinese government has begun a “concerted campaign of economic threats against the United States” (August 8). And unlike in years past, China now has the economic muscle to back it up.

Two leading Chinese officials have issued statements over the past few days warning for the first time that China might use its massive U.S. dollar reserves as a political weapon to counter U.S. congressional pressure.

Xia Bin, a cabinet-rank minister, was the first last week to state that China’s foreign reserves should be employed as a “bargaining chip” in trade talks with the U.S., although he also added that “China doesn’t want any undesirable phenomenon in the global financial order.”

He Fan, an official at the Chinese Academy of Social Sciences, went even further, warning that China could set off a dollar crash if it so desired. “China has accumulated a large sum of U.S. dollars. Such a big sum … contributes a great deal to maintaining the position of the dollar as a reserve currency,” he said.

Although Russia, Switzerland and several other countries have reduced their dollar holdings, “China is unlikely to follow suit as long as the yuan’s exchange rate is stable against the dollar,” He Fan said. If China’s central bank is forced to dump its U.S. currency, it “might lead to a mass depreciation of the dollar,” he said.

“The words are alarming and unambiguous. This carries a clear political threat,” to the U.S. Senate, Simon Derrick, a currency strategist at the Bank of New York Mellon, said.

China’s state media describes the use of the country’s huge dollar holdings (much of which are in the form of U.S. Treasury debt) as a political weapon as its “nuclear option,” indicating Beigjing could easily trigger a dollar crash of massive proportions. China is estimated to hold $900 billion in U.S. dollar assets. In comparison, the total number of dollars in circulation (as measured by M1) is $1.3 trillion. If China were to start dumping its dollars, U.S. interest rates would spike, inflation would soar, the housing market would get pummeled, and the economy would likely plunge into a serious recession.

In pressuring the Chinese, American politicians may be playing with fire.

America has been benefiting from China’s “crawling” dollar peg. To keep its currency relative to the dollar, China takes its trade profits and buys U.S. treasuries, effectively lending Chinese trade profits back to the United States. This has greatly benefited America by providing easy debt to finance its expenditures.

However, there is a trade-off in this process.

By keeping its currency undervalued, China not only keeps the status quo for its exporters, but it supplies America with dangerously easy debt. Like a drug dealer supplying cocaine, China provides easy loans to American politicians, who are more than eager to borrow and spend. Consequently, America has become addicted to the artificial short-term benefits supplied by Chinese lending, including low interest rates, increased U.S. consumer spending, inexpensive Chinese products and concealed inflationary pressures.

The trade-off, of course, is that America continues to become increasingly indebted to Beijing, and jobs continue to leave for China. America becomes more and more vulnerable economically and politically.

For these reasons, the U.S. economy is stuck between a rock and a hard place. America’s economic condition is deteriorating, yet present realities can be hard to accept.

President Franklin Delano Roosevelt once famously proclaimed that America didn’t need to worry about debt because it is owed to Americans. He argued that if the government pays interest, it’s paid to Americans, so it did not matter. Though that pretense is arguable, those days are now long gone.

Once the world’s dominant creditor, America is now its largest debtor, relying heavily on foreign nations to finance government spending. We no longer owe our debt just to ourselves, we also owe it to the whole world—much of it to China. As of the end of 2006, the federal government owed $2.2 trillion to foreign entities. Over one fifth of America’s official $9 trillion debt is now held by non-U.S. citizens.

America may be about to face the music.

By endorsing protective legislation against China, U.S. politicians may have started a series of events that will be difficult to handle.

America is in for some tough economic times ahead. Its massive debt loads have left the economy walking a fine line. If America imposes legislation to protect its manufacturing and export base, it risks a global backlash led by China that could wreak havoc on the dollar—and immediately throw the economy into turmoil. If America does nothing, it will continue on the present course of trade deficits, increased indebtedness and outsourcing—only stalling the day of reckoning.

Yet, America’s situation could have easily been avoided by living within its means and following simple, commonsense practices like avoiding debt to foreign powers, which obviously have their own best interests at heart.

God warned the ancient nation of Israel about the folly of foreign debt, and what the eventual outcome would be. Read it for yourself in Deuteronomy 15. God specifically told the people of Israel that if they wanted to prosper, they could lend to other nations but not borrow from them (verse 6).

As wise King Solomon noted, “The rich ruleth over the poor, and the borrower is servant to the lender” (Proverbs 22:7).

America being held economically hostage by a country that is still largely Third World shows just how precarious the U.S.’s economic position is.