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International News Title: China Looks to Liquidate US Treasuries, Diversify Into Physical Assets The sheer size of US debt and the realities of our ability to pay this money back has come under fire by individual Americans and foreign governments alike. Anyone who has been paying attention understands that there are really only two options left for the US government when it comes to our debt and paying it off is not one of them. Either we will default on our loans, a situation made plausible by none other than Tim Geithner at the beginning of the year, or we inflate the debt away. Any astute investor knows this. And the Chinese government certainly qualifies as astute. They know whats coming. That being said, its no surprise, then, to see high level Chinese business and policy leaders let their plans slip out from time to time. The most recent comes from Li Daokui, an economist and adviser to Chinas Monetary Policy Committee: The incremental parts of our of our foreign reserve holdings should be invested in physical assets, said Li Daokui at the World Economic Forum in the very rainy city of Dalian former Port Arthur from Russian colonial days. We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way. Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries, he said.
The Chinese are clearly vexed with Washington, viewing the Feds QE as a stealth default on US debt. Mr Li came close to calling America a basket case, saying the picture is far worse than when Ronald Reagan and Margaret Thatcher took over in the early 1980s. Mr Li, one of three outside academics on Chinas MPC, described the debt deals on Capitol Hill as just trying to by time, saying it will not be enough to stop Americas debt dynamic turning dangerous. Source: Ambrose Evans-Pritchard Weve heard the arguments that China and the US have a symbiotic relationship, and that China essentially has no choice but to continue buying our debt. If they stop, or try to diversify their assets too overtly, then it would not only collapse the United States, by China as well. We dont disagree with this assessment. However, it is our view that the Chinese would be willing to drop into depression if it meant permanently dethroning the United States as the worlds only super power. Mutually assured destruction is a policy of their government just as much as it is of ours. From time to time we hear statements from influential citizens of China. Because all business and policy in China is commanded and controlled by the Chinese government, we can rest assured that Mr. Li recent musings are state sponsored. Even if he didnt mean to let them slip out, it is a window into the goings-on behind the scenes in Chinese economic planning and war gaming circles. While we cant predict exactly how such a scenario would play out, in his book Indivisible, author Troy Grice depicts one such possible end game of a Chinese liquidation of assets: Things are very shaky right now, Mae. I mean we are really on the razors edge. The problem isnt China so muchwe know what theyve been doing with their recent liquidations. The real issue is Japan. Theyll be out of cash in a matter of weeks. We dont know if theyll default on their debt or start selling off assets. If they start selling assets theyll start with U.S. Treasuries. With China selling too, well have to make sure they dont whore up the market too fast. Whats too fast? Mae asked. Were hoping for
well
weve been calling for an orderly crash. We need to slow things down so our banker partners can get out. If the banks get caught hanging in too long then it could be a real wild ride. Were talking the mother of all bank runs. Money marketsll break the buck. Mutual funds will dissolve. Pensions, government payrolls, AR factoring, inventories, everything is at risk if the panic infection spreads. The Fedll have to take over the entire banking sector and guarantee everything
monetize everything. Itll be a big, big mess. So are we talking months? Weeks? T shook his head. Mae knew that to mean days. Itll still be a selloff of unprecedented magnitude. The guard raised the arm and the SUV passed out of the ambient natural light and fully into the deeper dungeons of the complex. The Fed can slow it down by using the Wall Street operatives to buy up whatever the Japanese and Chinese sell with keystroke cash. But the huge volumes will trigger manual overrides at some point. With living, breathing animal spirits at the controls, it becomes a confidence game. Source: Indivisible by Troy Grice Once the confidence is lost, the whole paradigm shifts. When we hear influential Chinese figures use the word liquidate in the same sentence as US Treasuries then we really need to be paying attention. This may be just rhetoric today, but tomorrow it may be policy. As Grices Indvisible, Rawles Patriots and Novas American Apocalypse illustrate, if such an event were to occur, and China actually did pull the plug, we could very well be looking at a complete meltdown of our economic, financial, political and social systems. Recovery for such a collapse would be measured not in months or years, but decades and generations.
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