Most people refer to this as China threatening to use the ‘nuclear option’ of dollar sales. Here is a quote to get you started…..

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Read the rest here.

This week’s rant of the week comes from a Canadian doctor who has decided that socialized medicine just does not work. He has experience with both the American health care system and the Canadian health care system and he has deicide that there is no contest. The American system is better.

We wonder how long it will stay that way. We don’t want the Government controlling health care. But with all the law suites and all the regulations that surround medical care in the US, we are not inclined to feel too superior. Already there are places in the US that are having trouble keeping certain medical services available because of regulations and litigation costs (New York City for example).

(h/t to the Webutante for alerting us to this week’s rant)

This week’s essay of the week is Six Degrees of Separation by Andrew Davidson. It lays out a good explanation for what went wrong in mortgage backed CDO market. But I think that Mr. Davidson point applies to more then just the mortgage market. It is not good for there to be too much separation from any investor who is risking his capital and the product that his capital is producing.

Jim Cramer has made a career out of being an ass, but this is still going to be a classic video. I have a feeling that financial people are going to remember this video longer then Howard Dean’s scream. Here is the link. Go watch it now.

If you don’t know who Jim Cramer is here is a Wikipedia article about him. Here is a Business Week article about him before the current troubles. Here is a Calculate Risk post on the video. Read the comments.

It is getting rough out there in the mortgage backed security market. Everybody is freezing up except the federally sponsored agencies. This was written buy the boss of Indymac Bank….

Unfortunately, the private secondary markets (excluding the GSEs and Ginnie Mae) continue to remain very panicked and illiquid. By way of example, it is currently difficult, at present, to trade even the AAA bond on any private MBS transaction. In addition, to give you an idea as to how unprecedented this market has become…I received a call from U.S. Senator Dodd this morning who seeking an understanding of “what is really going on and how can I and Congress help?” I also have talked to the Chairman of Fannie Mae this morning and have traded calls with the Chairman of Freddie Mac (Fannie Mae’s Chairman telling me that they are “prepared to step up and help the industry”).

Unlike past private secondary mortgage market disruptions, which have lasted a few weeks or so…our industry and Indymac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself. As a result, we have seen just since yesterday, many major mortgage lenders announce additional product cutbacks…some leaving subprime, Alt-a, and other products altogether or restricting some products to only their own retail channel (and possibly wholesale) and significant, additional price widening.

The whole thing is worth reading.

H/t Calculated Risk . His post has some very good comments attached to it as always. But I am too lazy to dig them out for the rest of you. But don’t miss this chart that Tanta linked to showing that alt-a and sub-prime accounted for 40 percent of what was issued in 2006. It’s a scary world.