The economic nuclear option

Kash over at the Angry Bear makes a good point. Our current account deficit is resulting in a situation where China has more and more power over the value of our currency. So far, they have deemed that it is their interest to keep the dollar shored up. You might even argue that they will keep shoring up the dollar just out of self-interest, since they themselves will be damaged by the economic fallout if the U.S. economy crumbles.

Yet the very fact that they have the power to destroy the dollar's value overnight changes the calculus of political negotiations. Just because a country doesn't plan to use their nukes doesn't mean they won't use them as bargaining chips.