Do you remember back in the late 1980’s when “Japan is going to take over the world” was all the rage? The Japanese had so much money that they bought US gem properties such as Pebble Beach and Rockefeller Center only to lose them just a few years later as their borrowed “pump” money started to dry up. Now, enter China, they have supplanted Japan as the biggest creditor to the US and our largest “trade for Dollars” partner.
China bubble in ‘danger zone’ warns Bank of Japan – The Telegraph
If you look at the Chinese stock market, it looks very much like Japan’s did back in 1993 or so, it is down some 70% from the 2007-08 peak and now making new lows. Their trade surpluses and industrial productions are down no matter “what” they say officially, all you need to do is look at the electricity use to know that they too are entering recession with the rest of the world.
The huge amount of US Treasury securities owned by the Chinese is a well known fact but not one that many have connected the dots with yet. We do know that the Chinese have definitely slowed their purchases of Treasuries but “no big deal” seems to be the reaction as we have “The Bernank” and his ability to print and buy. I ask, what happens if the Chinese become sellers of this horde of Treasuries? There are several scenarios where this could happen. What if they were FORCED to sell to protect their own domestic economy and repatriate capital? Or worse, what if they decided to use their Treasuries as a financial weapon against the US and sold bonds en masse to create or force interest rates higher? What if they did this in conjunction with turning all of their Renminbi deals on full force and shunning Dollars altogether?
I ask these questions because China is certainly not Japan. Japan has been and is a US puppet that has done everything that we’ve asked of them, China is no one’s puppet. In fact, if you look back over the last 12 months or more, China has been quite boisterous about US over indebtedness, the dangers of the Dollar being backed by nothing and over printed, AND the virtues of Gold as money. No, China is not Japan for the simple reason that Japan rarely spoke about Gold (maybe because they have a huge cache under the Palace) while China rarely misses a chance to talk about it as they know that it’s our Achilles heel. China has become the biggest global producer of Gold and none of it is allowed to exit their borders. Added to this fact is that China is now a very close second place in the consumption of Gold to India and rising quickly. One other small (sarc) detail is that China is not levered nearly to the extent as Japan has been and is. I guess the best way to put it is that Japan facilitated our insanity and China is “resisting” it.
“Resisting” it may be an understatement. China knows better than anyone the dangers of a fiat currency as they invented paper currency and over the years have blown up more fiat schemes than you have fingers and toes. In my opinion, China has slowly but surely gotten itself to the position it is now in, namely our adversary in a global economic and financial war! They have acquired and built their own “button” where they can push it and literally blow up our Treasury by forcing rates higher at a time that we are unable to pay. They have purchased the London Metal’s Exchange for the ham sandwich figure of just over $1 billion and plan to move the exchange to within their borders. Now, we hear rumors of a huge and out sized purchase of Gold in the works of up to 6,000 tonnes. Rumor? Yes. Substantiated? No, but…it does make perfect sense and if you ever have played chess before, a perfect move if they make it.
Follow this through, China is our biggest creditor and can dictate our interest rates (higher) if they wish by simply hitting the “sell” button. They have slowly but surely replaced our manufacturing base with a new, state of the art one of their own. They have been circling the globe for several years securing and purchasing the rights to the raw resources and materials necessary to supply this manufacturing base. They have done this using contracts written in Renminbi terms and thus pushing the Dollar aside. They now have their own metals exchange and one must wonder whether or not some of this huge rumored purchase is meant to back the exchange? Or…whether it is meant to back their currency? But…but…such a purchase would blow the price of Gold to the stratosphere wouldn’t it? Yes, which, IF the Gold is actually present inside of Ft. Knox, West Point etc. will not necessarily be a bad thing…unless…it’s not there.
I believe that what China has done for the last ten years was “training” to get themselves in the best shape possible to call our bluff. They, in my opinion are about to wage war without firing a single bullet (hopefully). Could it be that the Chinese believe our vaults are empty and our investment banks (JP Morgan et al) are short? I think we will all know very very soon as the physical stresses in the markets come to a head. One last set of questions, do you think that the Chinese give a rat’s ass whether their stock market is “down” and making new lows? Do you think the level of the stock market is important to US authorities? Is the price of Gold more important to the Chinese or how many ounces that they hold? Is the Gold price more important to US authorities or how many ounces that they hold? Answer these questions correctly and you too can have your very own “99 year plan”!
Significant geo-political changes are occuring. Check out the list of 120 countries that are attending the NAM (Non Aligned Members) meeting in Tehran. Check out the 30 or so countries that either voted against or abstained in the last UN General Assembly vote regarding Syria. Also check out the Shanghai Co-Operative Organization and its member countries. Check out the BRICS and their plans to set up their own World Bank.
I think you will find that the USA and Britain have managed to alienate a sizable portion of the world and these countries are responding by starting to move away from the Anglo-American paper financial empire. Even small countries like Ecuador are not prepared to be browbeaten by the west and recently gave the UK the finger over Julian Assange.
This shift will spell serious trouble for the Anglo-American empire in the long run. When China is ready to start dumping US Treasurys after fully hedging it’s foreign cureency reserves with tangible assets, it could be game over.
Correct except for the word “could”…you meant to say WILL be game over!
I agree with most of what you have written. All I was trying to say is that China is an adversary as where Japan an ally and that China has the ability to break the daisy chain of derivatives on their own (intentionally). They have spent years tying up raw resources and materials by contract, now have a modernized industrial base and they DO have Gold, both vaulted and in the ground. They are manipulating their currency in the oppsosite direction of ours, they are depressing the Renminbi while we are supporting the Dollar. The daisy chain can break for a myriad of reasons and some as simple as a trader waking up on the wrong side of the bed. I am under no illusion that everything is good in China and certainly don’t expect the population to break out singing “Kumbayah”.
I didn’t mean to have a tone,and I do agree with you on some points.I just truly think that when this bogus,corrupt system put into play by ole tricky Dick collapses nobody will be spared.You guys are great.Keep up the good work,my friend!
No problem Scott, I agree, this will affect everyone on the planet!
I love your commentary,but your views on China are flat-out wrong.Below, I have listed several problems facing this despicable Communist country:
1)China now has 30 million more men than women.Further complicating this matter is the fact that its population is aging rapidly.1.2 billion people and not enough young workers=MAJOR PROBlEM going forward.
2)China has NO WATER.It has polluted its rivers,lakes,and streams to such an extent that it has to import water for things like irrigation,commerce,and general well-being of its people!Moreover,how long do you think the rest of the world will sacrifice its own self-interest to do business with a nation that imposes severe tariffs on imports and has a centrally planned state-run economy,the antithesis of Capitalism.Oh?China is going to hoard rare-earth metals?Ok,the U.S.won’t supply it with soy?No gold and silver exported?No problem.Canada won’t supply it with timber.Etc,etc,etc.When it comes to global trade,China is in the worst position due to its lack of water AND soy AND energy.If it does not truly open up to the West,China will die from a thousand cuts.Once chaos breaks out(shortly,I believe),contracts like those made with Brazil’s Petrobras will go right out the window.China’s global standing is tenuous at best.
3)Exploding middle class?HA.China still has 100 million peasants(1/3 of our entire population) subsisting on the equivalent of a few dollars per day.
4)China’a economic prosperity is an illusion.First,their export model built on slave labor has KILLED their trade with the West.Second,entire ghost cities the size of Philadelphia have been constructed for the sake of construction.The largest housing bubble in the history of the world is about to pop.And what are the migrant workers going to do when wages in the West have been destroyed to the point that 10% economic growth year over year is no longer possible?Consumption will have to rise in the East to meet demand lest China languish like Japan has for 20+ years.This means wages will have to go up to stimulate the necessary discretionary spending.This means the party will have to relinquish some of its control.Who among us realistically thinks this will happen?Also,wage increases will hurt job creation as jobs once sent to China will seek out other slave labor markets.Basically,China has the very same paradox as we do with regard to its division of labor and its future role in catallactics.Only problem is,we live in a free(for the most part)society and theirs does not.
5)Communism and Capitalism cannot exist simultaneously in the same social strata-their philosophical and economical differences are too vast for any government to bridge effectively. The former has no use for individuality and independence, while the latter is a touchstone for the entrepreneurial spirit. One disdains liberty, the other increases it.China’a social and economic duality will have one of two eventual outcomes:revolution in China or obliteration of Western civilization.Either way,the consequences are catastrophic for all.
6)China’s economy is going to die along with every other fiat currency based economy.RMB as the world’s reserve currency?What a joke.The Chinese have neither the invention or freedom to pull this off,nor is the RMB stable enough at this time present any significant threat to the USD or the US Military Industrial Complex..The Communist regime would have to cooperate far more with its trading partners than it currently does.16 new currency agreements are one thing;embracing actual fair trade policy on a global scale is quite another.They,too, have trillions in debt,manipulate the Yuan exchange rate,still have no per capita income when compared to the West, continue to print paper money,have no labor or environmental standards,and practice the same accounting fraud as the West.All economies are linked now,so when the 40 yr fiat model dies,China will be going down the drain with us.China simply does not have enough time to impose its will on the world.
7)China is in no shape to do anything to USTs.To risk all-out economic war with the West would be suicide.The IMF,World Bank,and UN are all controlled by the United States.China’s GDP is still only 1/3 of ours and of you include Europe,1/6.And when you calculate all the gold held by the West,it will take China decades to catch up.
The real enemy is and has always been Goldman,JPM,B of A,the Fed,and the ECB-the SHADOW BANKING SYSTEM.The machinations of Paulson,Blankfein,Dimon,Master,Draghi et al far outweigh anything the feckless Chinese government can do to us.And like globalization ,China’s rise is finished.Some silly,corrupt communist nation whose rise to power has been completely dependant on piracy,currency manipulation,excessive tariffs,and slave labor is no threat at all.Not in this century or any other.Monetary rot,hyperinflation,and a Western banking collapse brought on by OTC Derivative interest rate swaps?Well,that’s another matter entirely.