And for almost any given reason, the Chinese could “end the game.” I am sure that I will receive comments telling me that the Chinese would never do anything to “end the game” because they would only be harming themselves. I will hear, “Who would ever do harm to themselves or upset the apple cart in a good situation?” I have recently written several times that China has “played the game” and basically carried us as a boxer who would have been instructed not to knock their opponent out until a certain round. I also believe that they have improved their “physical” (both monetarily and through infrastructure) position while doing this.
So just “how” could China deliver a knockout punch? The “potentials” are many and as I said “for almost any given reason.” China could simply dump their Treasury securities and “make” interest rates rise, this might be the easiest way. Were they to do this, derivatives of all sorts would be ignited into an implosion scenario all over the world. This would also upset uncomplicated and ordinary “carry trades.” It would directly affect the U.S. through higher mortgage and auto loan rates. Higher rates would also directly affect the balance sheets of any and all financial institutions.
China could also “go hot” in their disputes with Japan and South Korea. They could initiate or provoke some sort of military action…which would of course also include the sale of treasuries. How better to injure your opponent than to hit him where it hurts the most…the pocketbook. The outright sale of dollars on the open market is also an option but selling dollars “from” Treasury sales would give them a “two fer.” Or, how about the outright purchase of dollars and devaluing their own currency? How would that work out for us?
They might also choose to “court our friends” and allies into business relationships. Personally speaking I saw this with my own two eyes. For what reason would the Chinese build roads, bridges and even the national soccer stadium in Costa Rica? Costa Rica is a country geographically close to the U.S. with banking ties and they even officially use dollars along with their own currency…so why would China even bother? Umm, maybe for a part of Costa Rica’s agricultural exports? Or because they are a neighboring nation to the Chinese controlled Panama Canal? Or maybe to just get their foot in the door and become another thorn in Uncle Sam’s side? Who knows but it has become a rather cozy relationship. You must hand it to the Chinese, they have been at least one step ahead of the Americans when it came to locking up raw material deals in resource rich Africa and they have quite large trade deals with both Canada and Australia.
China could, when the time comes, unilaterally blow the price of gold to nearly any price that they wanted. Should they be on the “non” receiving end of a failed delivery this might be exactly what they do. If (mathematically “when”) they do not receive metal, all they have to do is make an announcement that will echo and reverberate all over the world. They could easily say, “We will pay $4,000 per ounce for any and all gold that anyone wishes to sell us.” Why would they “overpay” at such a high rate you ask? Because at the current “made up market prices” they are not getting their fill. A marked up price would be like a final “street sweeping” to part “fools from their real money.” You don’t think so? Please remember that once their supply is shut off, they can bid whatever price that they’d like…which immediately becomes the new “market price”…which means whatever they already owned just became worth many multiples of what they paid.
China will absolutely do economically, financially and militarily…whatever is best for China. Did they “fool” the U.S. into thinking that they were “team players” by soaking up much of the debt that our Treasury issued? Yes, they probably sat at a table with Robert Rubin and Larry Summers and just nodded their heads in agreement while seeming financially ignorant. I would also guess that our “delegation” left the dealings laughing at how gullible the Chinese were. While you may not see it yet, the joke is on us because China, whether we like it or not…is our BANKER.
Finally, China has just begun weakening their currency versus the dollar. Can you say “currency wars?” A weaker Yuan means they are trying to protect their manufacturing base. This is good for whom? Well China of course which means less U.S. exports to and more imports from China. Does a “less vibrant” U.S. economy make it easier or harder for the U.S. to service its debt to their bankers (the Chinese)? A little more burdensome maybe? And at a time that the U.S. economy looks like it’s slowing already? Gee, what a coincidence. Before I finish, for how many years now has the U.S. been “demanding” that China “revalue” their currency higher? At least 10 years? …And now all of a sudden China does an about face and begins to devalue? Because it’s in China’s best interest…and not in ours. I guess the old saying “he who has the gold makes the rules” will unfortunately (for us) ring true again!