Will China Stop Buying U.S. Debt?

A few weeks ago, the Telegraph UK did a story about the sharp drop in foreign holdings of U.S. Treasuries.  One of the big buyers of American debt is, of course, China.  There are those that think China is forced to buy our debt otherwise its economy will collapse.  Until the Treasury releases what is called “TIC” data  (Treasury International Capital) in November, we really will not know what is going on.  That is when the world will know for sure who is buying U.S. debt and who is NOT buying.  Brandon Smith from Alt-Market.com thinks China is already heading for the exits when it comes to Treasuries. He makes a very good case for his point of view in the post below.  Please read and enjoy. –Greg Hunter–

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Is China Ready to Pull the Plug?

By Brandon Smith Guest Writer for USAWatchdog.com

There are two mainstream market assumptions that, in my mind, prevail over all others. The continuing function of the Dow, the sustained flow of capital into and out of the banking sector, and the full force spending of the federal government are ALL entirely dependent on the lifespan of these dual illusions; one, that the U.S. Dollar is a legitimate safe haven investment and will remain so indefinitely, and two, that China, like many other developing nations, will continue to prop up the strength of the dollar indefinitely because it is “in their best interest”. In the dimly lit bowels of Wall Street such ideas are so entrenched and pervasive, to question their validity is almost sacrilegious. Only after the recent S&P downgrade of America’s AAA credit rating did the impossible become thinkable to some MSM analysts, though a considerable portion of the day-trading herd continue to roll onward, while the time bomb strapped to the ass end of their financial house is ticking away.

The debate over the health and longevity of the dollar comes down to one very simple and undeniable root pillar of economics; supply and demand. The supply of dollars throughout the financial systems of numerous countries is undoubtedly overwhelming. In fact, the private Federal Reserve has been quite careful in maintaining a veil of secrecy over the full extent of dollar saturation in foreign markets in order to hide the sheer volume of greenback devaluation and inflation they have created. If for some reason the reserves of dollars held overseas by investors and creditors were to come flooding back into the U.S., we would see a hyperinflationary spiral more destructive than any in recorded history. As the supply of dollars around the globe increases exponentially, so too must foreign demand, otherwise, the debt machine short-circuits, and newly impoverished Americans will be using Ben Franklins for sod in their adobe huts. As I will show, demand for dollars is not increasing to match supply, but is indeed stalled, ready to crumble.

China, being the second largest holder of U.S. debt next to the Fed, and the number one holder of dollars within their forex reserves, has always been the key to gauging the progression of the global economic collapse now in progress. If you want to know what’s going to happen tomorrow, watch what China does today.

Back in 2005, China began a low profile program to issue government debt denominated in the Yuan, called Yuan bonds, or “Panda Bonds”. This move was almost entirely ignored by establishment economists. They should have realized then that China was moving to strengthen the Yuan, expand its use in other markets, and recondition their economic structure away from export dependency and towards consumerism (as they have done with the establishment of the ASEAN trading bloc). Of course, in the MSM at that time, there was no derivatives bubble, no credit crisis, no debt implosion. America was on cloud nine. China, through inside knowledge, or perhaps a crystal ball, knew exactly what was about to happen, and insulated itself accordingly by generating distance between its system and the soon to derail retail based society of the U.S. This dynamic has not changed since the 2008 bubble burst, and Chinese activity is still the ultimate litmus test for economic volatility.

Today, there is widespread confusion in markets over the direction of America’s financial future. In the wake of the credit downgrade, most investors unaware of the bigger picture are desperately clinging to any and every piece of news no matter how trivial, every rumor from the Fed, and every announcement from the government no matter how empty. China’s economic news feeds have been tightly regulated and filtered, even more so than usual (which is cause for concern, in my opinion), while distractions in Europe abound. Let’s take a step by step journey through these issues, and see if we can’t produce some clarity…

U.S. versus EU: A Game Of Hot Potato…To The Death?

The theatrical seesaw between the U.S. and Europe is not only becoming obvious to the most narrow of economic analysts, it is also becoming kind of boring. The entire ordeal has been subversively exploited as a false example of systemic “contagion”, and with purpose; global banks need to convince average Americans and average Europeans that destabilization in one portion of the world will automatically lead to destabilization everywhere. This concept is true only so far as forced globalization and centralization have made it true. That said, the charade has been somewhat effective in conditioning the populace with ideas of collectivist survival. In other words, we are being trained to take fiscal responsibility for countries outside of our sovereign national boundaries as if we are morally tied to every penny they have or do not have (global socialism/feudalism – here we come!). This process is culminating in worldwide harmonization through fear as well as guilt.

What we are witnessing is NOT contagion. Instead, we are seeing multiple and mostly separate collapses activated simultaneously. Each nation suffering dire straights in Europe is doing so because of its own particular financial problems, not the problems of other countries nearby, and certainly not those of countries on the other side of the world. Contagion arguments are only applicable to those economies overly dependent on exports, yet, China has already shown (at least in the case of the U.S.) that such dangers can be controlled by minimizing exposure to the poisoned portions of the system and reverting to more internalized wealth creation.

Treasury Secretary Timothy Geithner and the heads of World Bank and IMF have perpetuated the lie of contagion between the U.S. and the EU primarily to service the progress of globalization, but also to hide the inflationary effects of dollar devaluation. While the greatest threats are stacked squarely against America’s economy and the dollar, somehow we have been led to focus on the comparatively less explosive drama in the EU. U.S. dollars, as well as Chinese funds, are flooding into Europe to support the region, while investment in the U.S. and its debt weakens and disappears. In the meantime, a weaker Euro makes the dollar look more attractive (at least on paper), but in reality, both currencies are on the path to bloody hari-kari.

How much longer can this game of hot potato go on? Again, China decides. Eventually, China is going to have to choose which currency to support; the dollar or the euro. Supporting both is simply not an option, especially when the chance of collapse in both currencies is so high. So far, the most logical path has been the euro. While the EU may suffer an astonishing breakdown, we must take into account that our own Treasury and central bank have seen fit to throw trillions of dollars into propping up Europe (with even more on the way):

http://www.reuters.com/article/2011/09/15/us-eurozone-idUSTRE78B24R20110915

With so much inflation and devaluation being thrust upon the dollar in the name of saving the EU, China’s move towards a stronger economic relationship with Europe at the expense of the U.S. is a no-brainer:

http://www.bloomberg.com/news/2011-09-14/china-willing-to-buy-bonds-from-sovereign-debt-crisis-nations-zhang-says.html

If I were to place a bet on who would come out of the crisis less damaged, my money would be on the EU, everyone else’s money certainly seems to be…

China Discreetly Moving To Dump U.S. Debt

China has been tip-toeing towards this for years, and has openly admitted on numerous occasions that they plan to institute a break from U.S. debt and the dollar in due course. Anyone who continues to argue that a Chinese decoupling from America’s economy is impossible at this point is truly beyond hope. Though increasingly more rare, news on China’s push to drop the U.S. still leaks out. Recently, a top advisor to China’s central bank let slip that a plan is in place to begin “liquidating” (yes, they said liquidate) their U.S. Treasury bonds as soon as possible, and reposition national investments into more physical assets:

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100011987/china-to-liquidate-us-treasuries-not-dollars/

But let’s step back for a moment and pretend China hasn’t told us exactly what it is going to do time and time again. Instead, let’s look at the fundamentals.

The primary concern in China right now is inflation. Because China does not yet have the ability to export its fiat to other markets the way the U.S. does, its own liquidity injections in the face of the credit crisis have led to severe price increases. In August alone, overall inflation was rated at 6.2% (always double government produced numbers to get true inflation). Food prices jumped 13.4%, while meat and poultry jumped 29.3%. Because these numbers are around 1% lower than in previous months, the Chinese government has prematurely proclaimed a “cooling period”:

http://www.telegraph.co.uk/finance/china-business/8751482/China-inflation-cools-as-food-price-rises-slow.html

With harsh inflation continuing unabated, eventually, the Asian nation will be forced to enact abrupt policies. This will likely take the form of a strong Yuan valuation, or a “floating” of the Yuan. A sizable increase in the value of the Chinese currency is the ONLY way that the government will be able to combat rising prices. By increasing the buying power of its citizens, the government allows them to keep pace with rising prices, and eases the tension within the populace which could otherwise lead to civil unrest. For China to ensure that a floating of the Yuan will lead to a much higher value, their forex and treasury holdings will have to fall. Period.

A dumping of the dollar will give the Chinese room to breath, and this space will be needed very soon. The debt ceiling deal made by Congress in the aftermath of the credit downgrade left the rest of the world unimpressed. While the MSM tries to make us forget that this event ever occurred, most foreign investors have not. Markets are anxiously awaiting an announcement from the Fed for further liquidity injections. If this announcement is not made after meetings next week, then it will certainly be made before the end of the year. Ironically, the same quantitative easing that investors are clamoring for today is liable to become the final signal for China to cut its losses and separate from U.S. securities completely. China has been positioned for many months now to take such measures…

Lights Out…

Delusions of Chinese dependency on the U.S consumer still abound, and those who suggest a catastrophic dump of U.S. debt and dollars in the near term are liable to hear the same ignorant talking points we have heard all along:

“The Chinese are better off with us than without us…”

“China needs export dollars from the U.S. to survive…”

“China isn’t equipped to produce goods without U.S. technological savvy…”

“America could simply revert back to industry and production and teach the Chinese a lesson…”

“The U.S. could default on its debts to China and simply walk away…”

“The whole situation is China’s fault because of their artificial devaluation of the Yuan over the decades…”

And on and on it goes. Though I have deconstructed these arguments more instances than I can count in the past, I feel it my duty to at least quickly address them one more time:

U.S. consumption of all goods, not just Chinese goods, has fallen off a cliff since 2008 and is unlikely to recover anytime soon. China has done quite well despite this fall in exports considering the circumstances. With the institution of ASEAN, they barely need us at all.

China is well equipped to produce technological goods without U.S. help, and if Japan is inducted into ASEAN (as I believe they soon will be), they will be even more capable.

America will NOT be able to revert back to an industrial based economy before a dollar collapse escalates to fruition. It took decades to dismantle U.S. industry and ship it overseas. Reeducating a 70% service based society to function in an industrial system, not to mention resurrecting the factory infrastructure necessary to support the nation, would likely take decades to accomplish.

If the U.S. deliberately defaults on debt to China, the global reputation of the dollar would implode, and its world reserve status would be irrevocably lost. We won’t be teaching anyone a “lesson” then.

Yes, China currently manipulates its currency down, but then again, so does the U.S. though quantitative easing. Both sides are dirty. Taking sides in this farce is pure stupidity…

Now that all that has been cleared up (again), the primary point becomes rather direct; the reason it is difficult to predict an exact time frame for an American collapse is because all the pieces are in place to trigger an event right now! There are, of course, stress points within the system that set a time limit, even on global banks and China, but a full spectrum catastrophe is not only a concern for some distant future. Every element needed for the so called “perfect storm” is ever present and ready to ignite at a moments notice. The destructive potential coming from China alone is undeniable. Everyday that the spark is subdued should be treated as a gift, an extra 24 hours of education and preparation. This is how close we are to the edge. It is not for us to be alarmed, but to be ready, and ever aware.

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You can contact Brandon Smith at:  brandon@alt-market.com   (You can go to Alt-Market.com by clicking here.)

Comments
  1. Stief Bijer

    First, thanks for the great articles!

    I have a question about one of the article’s conclusions:

    “For China to ensure that a floating of the Yuan will lead to a much higher value, their forex and treasury holdings will have to fall.”

    I looked for, but sadly did not see, any supporting information for this statement in the article.

    I would appreciate a brief explanation of the logic underlying this conclusion.

    Is there another article that would explain the background facts supporting this conclusion?

    Meanwhile, tick, tick, tick, tick…..hope you’re more ready for the “boom” that’s coming than I am. :-(

  2. Art Barnes

    Greg, well China seems in a good spot to take advantage of the fiat debt money system out of control, and, I would state further that China will move when it feels it can’t lose but only gain from a western economic collapse. One must remember, even though Mr. Smith did not articulate it, China is not our friend, never was. So it makes sense that China will stop buying or or sell its treasuries when China thinks it can come out on top after a collaspe and be the new reserve currency and the premire world power following such an event. When (as B. Smith again did not mention) this will happen is actually a political decision by China, but you can bet that sooner rather than later the propects, envy, and pure arrogance of wanting to be on top will outweigh their leaders caution and that will be the trigger; or, as B. Smith mentioned, the “edge”.

  3. Bob

    investor inflation. How many investor can a producer support and keep his cost down. How I see it, companies have cut labor to the bone so labor is not causing inflation. Can’t the investors and bankers live with in there means and stop taking hand outs from the governments. So what we have, are people who have out lived there usefulness just like ditch diggers being replace with one big shovel. How many banks do you need just one world bank are a bank in every country. The bankers and investors are a dying breed . They get piss at the government for helping people with programs but they are no different. They the bankers want what can’t be had, worth without a produce. All they produce is debt and inflation. I tell you whats going to happen local companies with local people making things they need. Big is out to expensive to many cost over runs to many people in the chain. Just like a government with to many people to many rules to many not producing anything but overhead. I saw this coming 35 years ago in construction . When I started we would have one shack on the job and one old mean boss. Over the years more and more white hats and bigger and bigger shacks for them. It got to the point were the white hats were eating up all the profits so the wages of the workers were keep flat but that didn’t help. So they started having more and more of these open ended contracts by stuffing the government boys pockets with kick backs. Yes you can blame labor but labor is a true investor and the first investor right after the idea. The one world bank is even a scam and won’t happen. LOCAL people will take care of there needs are go hungry. Don’t think I’m happy about this as I only have investments and my labor days are a thing of the past.But I know the world needs to move on by inflating my investment away it’s a cycle and this time a very big cycle. If you don’t plan on inflation you haven’t been thinking much. PEACE

  4. Mitch Bupp

    The beauty of the pyramid ponzi scheme is that the banksters have created a system where layers of debt have been woven into economies of countries a worldwide. This system is set up so money can be scrapped off the top of every country in the world and the layers are woven in such a fashion that if one country defaults it effects the economy of other countries. This is nothing more than economic bondage to the countries involved because we are being tied to private debt through public means.

  5. MasterLuke

    This is going to breed war.

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