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:
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:
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”:
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.
You can contact Brandon Smith at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
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written by TB44 , September 16, 2011
Although the news isn't good, this is the best article I've read in awhile. And so true how EVERYONE knows that China pulling out of the dollar would be disastrous but then they say it will NEVER happen...i hear it over and over...but oh it will happen and I agree that it could happen at any moment.
Again...awesome work!
written by china bull , September 16, 2011
hey brandon, great article, saw it on zh. just want to put my two cents in. certainly china will be in a position, with well over one billion people, to look inward for domestic consumption. however that is still a decade away. they are beginning to "urbanize" vast swaths of the interior, which has been ignored during its rise over the past decade or so. once they can bring these new middle class citizens on line, they can begin to unplug from the external consumer markets. until then, they will continue to purchase our debt and help prop up europe.
written by Brandon Smith , September 16, 2011
@China Bull
Not if we continue devaluation at the rate we are today. In fact, I suspect China will move to dump dollar denominated assets within the next year, not ten years. They are perfectly willing to take the loss in the face of greater dollar inflation.
Also, lets not forget ASEAN, which currently provides an export market on par with that of the U.S. and is still growing. China is perfectly capable of decoupling from the U.S. at this very moment if they wish.
written by Mac Hoban, Eggs and Bacon Bay Tasmania , September 16, 2011
China is governed by engineers whilst the US is governed by lawyers. Lawyers tend to see everything as a contest with a winner and a loser, whilst engineers build infrastructure to last the test of time.
As China redirects its attention from the US consumer to the enormous untapped demand of its own frugal but financially prudent population, it moves every day towards complete financial independence from the US.
The Chinese know they will not be paid what the US owes them. The US economy is simply not productive enough to generate that amount of surplus wealth. And they have not the political maturity, if the US had any spare wealth they would spend it on themselves.
The Chinese choose to support the greenback for now but there will come a time when that is no longer convenient. Why would they continue to support the USD beyond that point when the best they can hope for is to be repaid with worthless dollars, printed to create an illusion of the US settling its account?
written by Distant Observer , September 16, 2011
"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."
Is not the contagion argument based on the level of exposure to bad debt ? So, for example, the collapse of Lehman Brothers reverberated around the world not because Lehman Bros. was so central to global finances, but because of the number of banks exposed to the loss due to the breadth and complexity of inter-woven debt. And, likewise, a Greek default could result in a complete freeze-up of international lending as banks take stock of their losses and circle their wagons.
Or do I misunderstand you?
The rest of your article is very well argued, but I would add that increasing resource depletion will also greatly impede the ability of the US to re-industrialize.
written by Brandon Smith , September 17, 2011
@DistantObserver
The problem is that you are trying to apply reason to your specific definition of "contagion". The MSM and establishment economists don't do that. Your idea of contagion and theirs are entirely different.
When they speak of contagion, they are talking about the national debt of a country as if it is interlinked and entirely dependent on every other country. In fact, every country has its OWN debt problems, many of which are completely separate from those of other nations. The idea is to make sovereign countries feel responsible for the financial distress of every other country. The great lie is that by harmonizing and centralizing, we somehow prevent the "contagion" from spreading to ourselves. Its a massive sham. If Greece was simply allowed to collapse and then rebuild without all the insane liquidity injections and bailouts, the EU itself would not necessarily be any worse for wear, for instance...
The Lehman situation was a systemic crisis, but NOT a contagion in the sense that it somehow ravaged countries which were otherwise unexposed to derivatives. There is a big difference.
I agree on the point of resource depletion, but I don't think that is an obstacle we are facing today. Supply of materials is not the problem at present, but perhaps in the near future it could be.
written by azizonomics , September 17, 2011
http://azizonomics.com/2011/09...n-america/
I appreciate you breaking down the "China is dependent on America" bullshit. But this is going to rumble on: China is not ready to pull the plug yet. Maybe 2013-2020.
written by Realist , September 18, 2011
Hey, Brandon, ever since 15 August 1971 when President Nixon closed the gold window, the financial system in the world has been broken. It's a wonder it has lasted so long.
The US dollar is the world's reserve currency only by default. It is backed by nothing but a promise to pay.
The FED can print any amount of dollars it wants, the US$16.1 trillion it printed and loan to almost every bank around the world is testimony to that.
When Sir Issac Newton was appointed Master of the UK Mint, the first thing he said was “Gentlemen, in order to measure, you must define your unit”.
He went on to assign a unit of gold to the sovereign.
At Bretton Woods, an oz of gold was worth US$35. Today an oz of gold is worth US$1800. Who knows what an oz of gold would be worth in 2015?
Is it any wonder that China is ready to pull the plug and can we blame her?
written by DavidA , September 18, 2011
But I just booked a cheap air ticket to Costa Rica in November. Can this wait until 2012?
written by Jacques Desjardins , September 18, 2011
Congratulations Brandon!
This is indeed a great article. Crystal-clear, documented, and spot on!
And the interesting point is that it fully matches the analysis made by the European think-tank LEAP. See their last report from September 15th:
http://www.leap2020.eu/GEAB-N-57-is-available-Global-systemic-crisis-Fourth-quarter-2011-Implosive-fusion-of-global-financial-assets_a7640.html
and this one on the "great escape of China from the 'dollar-trap'. http://www.leap2020.eu/When-Ch...a3582.html
When points of view coming from such diverse sources converge, I tend to think that time is getting closer for the big shock!
Keep on with this great work.
Jacques Desjardins
written by digger , September 18, 2011
the chinese hegimony on rare earth elements is no doubt causing concern, i have felt this is one of the few things that pretty much guarantee everyone playing nice with china.
the recent discovery that the rare earth elements are contained in abundance in the mud content of the deep oceans bottom means that in a little while everyone will have a source of these materials.
I think this will embolden attitudes a little, surely they already know its a question of when and not if china is going to turn the tables, i believe you are right in your thinking that the time for these events are almost upon us.
Depression 2.0 twice as deep twice as long, and it's nearly here.
written by Walking Turtle , September 19, 2011
Friend Brandon,
Thank you for your forthright and well-documented analysis! At last Yours Truly finds a few voices such as yours speaking the truth of the matter, at least on the Internet. IMVH&Experienced_O, it is well past mere high time for the American Populace to be re-connected to the *reality* of the situation. Others more "powerful" than Yours Truly clearly think otherwise, though - at a short-term profit.
Fact: Decades of "Media Coordination" via the illegal and reckless CIA "Operation Mockingbird" program, compounded with the subsequent "Media Consolidation" of the nation's old-line "mainstream" media itself, have effectively rendered today's crop of infantilized (because de-educated) USA-ers quite incapable of making any real informed choice or even forming any genuinely intelligent opinion. This is directly due to the removal of the diversity of *convenient* publicly available *well-informed* points of view that once thrived and flourished coast-to-coast and border-to-now-NAFTA-dissolving-border. Just as Londoners are now the most heavily surveilled persons in the world, their American cousins have become the most heavily propagandized. Worse than in the old Soviet Union, per my old Russian friends (Heaven rest both of 'em).
Result: There is now little truth in the US news. But shall soon be no news in that American truth, shall there? After all, even sheep awaken every day.
Fact: This proactive de-education and concommittant dumbing-down of the mainstream American populace, coupled closely with the rise of the present-day NeoCon cadre (which is *nothing* like "conservative" and owes much to the power-grab politics of the likes of Leon Trotsky and even Josef Stalin) now presents a clear and present danger to exactly all the liberties and freedoms that we Old School types were brought up to hold dear. Aspartame+Fluoride synergy within the American human organism's biochemistry now appears to play a great role in the "pacification" of the American populace, in conjunction with all that violence+irrelevance-laden Telly-Vision. Not to overplay the sex-content nor the propaganda-as-news, of course. ("Stupidization" seems a more appropriately accurate term than mere "pacification", really, fwiw.)
Meanwhile, the elite Power Grabbers have consolidated their post-nine-eleven gains Stateside in ways that shall prove challenging indeed to correct in the longer term. Unlike with the prior S&L gutting-out (which brought 10,000 complaints from the USDoJ of the day and resulted in roughly 1000 judicial sentencings), today's elite-apex looters *hold* the *keys* to the *Empire* in their chubby soft pink little hands. These Criminal Elite, having forced the re-writing of most of the prior protective-and-preventive criminal laws put in place during prior more-honest US Administrations, are now proceeding apace with the destruction of all that has now been grabbed away from all the Rest of Us - and all we have left besides - at an obscene profit to their ilk and an obscene imposition of sheer misery all the way around the globe for their "inferiors". (Yourself, myself, the readership and all, by those lights.)
Fact: As I write, the New York City Financial District is fairly ringed-about with the warm bodies of thousands of savvy+angry people who see the Rest of the Deal they did NOT sign onto looming dead ahead. The cops surely know and are grateful that any looming Police State beef-up that may be "required" by the Criminal Elite in future will see to their continued employment. Firefighters not so much. Sanitary workers and many, many other Union folk, not at all.
Moreover, the Traditional Ancient Wisdom was not eradicated with the post-Mao Gang of Four's "Cultural Revolution". There is no doubt in YT's mind that China sees their day and their way rising in today's world from sheer First Causes. What dyed-in-the-wool Taoist would not?
Who first raised the word "insolvency" to prominence in reference to the United States' finances? Not any American bankster - a top (also solvent) Chinese authority did that. Who raised the first cries against the poisonous effects of "Quantitative Easing" (*inflation* by a newfangled name no matter how it is sliced)? No American Bankster did that - again, Chinese financial authority it was. And who does not wish to take a "Burn Job" in order that today's bloodthirsty Neocon insanity and mass impositions of sheer irreality should "level" (as in destroy) the whole round world ("except for Us Neocons and WE are IMMUNIZED")? In my own humble and experienced opinion, China. Thousands of years old, many dynasties long, resiliant because wiser than most, and absorbent of every invading force (no Iraq in China, and the Afghan People sure know it).
Thirty and even twenty years back, only a few long-sighted ones saw this present situation incoming due to the cause-and-effect fallout from the "Reagan Revolution". Ten years back, such dissent was all but retroactively criminalized by a prefabricated and then pounded-in "Patriot(sic) Act". By the end of 2008, though, the wheels had well and truly fallen off the Exceptional American Finance Wagon foursquare. Once the destruction and subsequent (yes, and I am very sorry but this is so) *liquidation* of the US's starving remains is accomplished, the likes and heirs of R. Perle, P. Wolfowitz, R.B. Cheney and what remains of the the Bushes (among a gaggle of others) will doubtless turn in earnest on China.
Then the fun really begins, for NeoCons and their college-educated sycophant fellow-travelers are a criminally+diabolically clever lot. Think I'll sit that one out; times here are already Very Interesting here in America, under all the peeling paint, chuckhole trails billed as "roads", and Very Shiny chromium-plated "Service Economy" gloss of "Jobless Recovery"(big-lie).
This too shall pass. Only the Way (Tao) is Eternal. China knows this is so. America has been made to forget such things; this one knows because I was watching as it was being taken-up and done. Gong hey fat choi! And that is all. 0{:-|o
written by canadian , September 19, 2011
I agree with practically all points mentioned in the article. However, one very important is missing which is US manufacturing base on Chinese territory.
Chinese deliberately attracted large portion of US Corporate assets (mainly manufacturing) to their so called Free Economic Zones. Over 50% of the S&P profits come from abroad , largely made in China. Those corporate assets (including the Know-How,which is priceless) are the guarantee (call it security in lieu of debt) that the debt will be honored.
US Government and the media, pretend to not notice this obvious arrangement. However,it can be expected that , in case of the US default on debt, China will nationalize all US assets on their territory. This will amount to decapitation of the US economy in the sense that the body (manufacturing) in China will be severed from the head (executive headquarters in the US) with one clean legal directive by the Chinese Politburo. This event will be followed by other creditor countries. It will mean the end of the US power as we know it. It will take decades for the US to recover from subsequent economic collapse.
One of the examples of how China takes over US manufacturing is recently imposed control by the Government over the Rare Earth Metals manufacturing and exports. This puts Chinese Government in monopolistic position over those chemical elements, which are essential in manufacturing of most of the high tech products; from flat screens to electric cars. Companies will be forced to move their production to China in order to tap Chinese made Rare Earth Metals. Obviously , very clever plot to further deepen dependency of the US economy on Chinese.
written by C. Turner , September 19, 2011
I believe that the US government monetary policy is like the US Department of Forestry's fire containment policy of the 1950-2000 which consisted of fighting every fire to a standstill (even though fire is a natural and important part of the life cycle of a forest). By allowing the "duff and undergrowth" to pile up year after year, resolutely fighting each natural attempt to correct the situation, we are setting ourselves up for a larger, more dangerous conflagration when nature eventually overcomes all efforts. These "failures" are natural corrections and should be allowed to happen in a smaller, manageable and controlled manner.
written by Realist , September 20, 2011
@Canadian
So long as the US debt is denominated in US dollars and the latter is the world's reserve currency and the FED can print any amount it wants out of thin air, the possibility of a US default is moot.
The speculation that "China will nationalize all US assets on their territory" is just that, speculation.
The reason China may pull the plug is not due to the fear of default but of chronic devaluation of the US dollar. Since 1971 the US dollar has devalued by 5143% against gold.
As for rare earths, China only has about 37% of the world's deposits but is expected by all and sundry to produce 95% of the world's annual requirements, never mind that this comes at a very heavy price, ie pollution from by-products like thorium and uranium.
When rare earths production commences in the USA, (Molycorp), in Australia (Lynas, Arafura and Northern Minerals ) and in Greenland (Greenland Minerals & Energy Ltd ) China's alleged "monopolistic position over those chemical elements" will be history and so will, I hope, the misplaced rancor.
written by Brandon Smith , September 20, 2011
@Realist
One thing we should not forget, though, is the DELIBERATE actions on the part of the Federal Government to limit or completely restrict resource utilization in this country. As long as that continues (and it will, even in the face of collapse), China will indeed retain its monopoly on rare earths production.
I can see Canadians point, and I can see yours. They are both correct depending on the particular outcome.
written by Stief Bijer , September 20, 2011
First, thanks for the great articles!
I have a question about one of your 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 your article.
If you miraculously have time, I would appreciate a brief explanation of your logic.
If you are normally over-busy (who isn't?), can you steer me to another article that would elucidate the background facts supporting your conclusion.
Meanwhile, tick, tick, tick, tick.....hope you're more ready for the "boom" coming than I am.
gratefully,
Stief
written by Brandon Smith , September 20, 2011
@Stief
First, you have to understand how China maintained its dollar peg for so many years, which ultimately amounts to currency manipulation.
When China purchases the incredible volume of dollars and treasuries that it does, it artificially increases the value of the dollar by diminishing international circulation, as well as creating the illusion that U.S. debt is under high demand.
In the meantime, they restricted international investment and dissemination of the Yuan in order to prevent free markets from being able to effect the value of China's currency market through investment.
So, the result is trillions of massively overvalued dollars being held in coffers all over the globe (but mostly in China), and a Yuan that is greatly undervalued compared to other currencies because of all the forex reserves China has accumulated (remember, supply and demand is key). China did this in order to severely diminish its export costs, thus making it unbeatable in terms of manufacturing. America went along with it, because we wanted incredibly cheap goods and labor.
Now, China is switching gears. They are spreading the Yuan all across the globe, and slowly decoupling from their dependence on exports, especially in the U.S. This has caused considerable inflation in China.
For China to combat rising prices, they must allow the Yuan to appreciate in value. They have already tried raising bank holding requirements to remove extra yuan circulating through the system. This has utterly failed to prevent inflation. So, their only other option is to float the yuan, stop any peg to the dollar, even a loose one, and allowing the market to drive up the price through investment.
However, there is no guarantee that floating the Yuan will cause the value compared to other currencies to increase fast enough to counter inflation. It could even lose value over a short time, especially if they continue to prop up the dollar. Therefore, it is inevitable (and logical) that they begin dumping forex reserves, as they have openly discussed on numerous occasions (you are welcome to google that), after floating the Yuan, in order to make other currencies less enticing to global investors (namely the dollar) and the yuan more enticing. This would ensure the considerable appreciation necessary to increase the buying power of their citizens before inflation ravages their economy.
I didn't include all of this in the above article because first, I have written about these basics in many past articles, and second, because, well, its boring. However, I do recommend anyone interested in how forex reserves effect currency value do their own research, and if they find they still disagree with my analysis of the situation, they are welcome to come back and present their findings.
written by Realist , September 20, 2011
@Brandon
I beg to differ with the observation that with "the DELIBERATE actions on the part of the Federal Government to limit or completely restrict resource utilization" then "China will indeed retain its monopoly on rare earths production."
This cannot be true because the US does not have the world's largest deposits of rare earths to affect the global rare earth elements (REE) supply equation.
China became the world's largest producer of REE only by default as the low prices meant that it was not economical for mines in the West to compete.
But REE prices, especially the heavy REEs, have shot through the proverbial roof and there is no excuse for mines in the West not to start producing these precious elements post-haste.
Even if the US unwisely chooses to restrict resource utilization there are rare earths deposits in Greenland and Australia which are much larger than the rare earths deposits in China or in the US, combined.
For example, Greenland Minerals & Energy Ltd has reported one of the world's largest deposits of rare earth of approximately 6.6 metric tons. When production commences in 2015, it could easily be the biggest producer of rare earths in the world. See link:
www.ggg.gl
Lynas Australia will probably be the second largest producer of REE and it is almost ready to roll, followed by Arafura and Northern Minerals in the wing.
It is clear that China will not retain its monopoly on rare earths production once these new REE mines above come on stream.
written by Brandon Smith , September 21, 2011
@Realist
You seem to have missed my primary point, which was that the U.S. will have little if ANY ability to affect rare earth markets within its borders, especially with restricted resource procurement. I was not commenting on Australia or Greenland.
However, you are operating on numerous assumptions, including the assumption that such mining will take effect in these countries by 2015. I seriously doubt this, especially with mining operations across the globe diminishing, not increasing. You also seem to be assuming that the U.S. will somehow benefit from such mining. This may not be the case. There is nothing that says Australia and Greenland will not be just as dominating of rare earth outflows as China is.
Honestly, the rare earth issue is secondary, and ultimately insignificant when compared to the dollar issue. As the collapse increases in speed, demand may fall to the point that few will care about rare earth production at all. Lets not get sidetracked on a side-note problem and lose sight of the bigger picture.
written by Realist , September 21, 2011
@Brandon
Actually, I agree with you that "the U.S. will have little if ANY ability to affect rare earth markets within its borders" and for that matter around the world as the US does not have enough REE reserves to change the supply dynamics.
The forecast that production will start by 2015 is too conservative because Lynas is now ready to ship ores to Malaysia for processing only to be stymied by the locals because of perceived radioactive pollution.
Once that impasse is solved, Lynas is slated to produce 1.4 mt of REE per year and will become the world's biggest producer in the interim period.
And once Lynas' products are in the markets prices of REE will recede to a comfortable level and it will benefit all users, including those in the US and Japan.
The US will also benefit when Molycorp starts production.
The fact that big producers like China, Australia, US and Greenland are lining up to supply REE in the near future, there is no chance of any monopolistic practice by any one producer, least of all China.
I agree the REE discussion is secondary compared to the dollar issue. I brought it up to rebut a misconception about rare earths and China by the poster, Canadian.
Whether China will pull the plug ultimately depends on when China think it is appropriate to do to maximize her own self interests, as in the case of all sovereign states.
written by Realist , September 22, 2011
@Brandon
To label China a currency manipulator, which even Geithner has so far avoided to articulate, is a logical fallacy.
How is it possible to manipulate a currency, which is the world's reserve currency, when the yuan was pegged to it at a fixed rate in the past as is the case of Hong Kong and some Gulf State nations and even Malaysia until recently.
Isn't it the role of a world reserve currency to act as the ultimate currency benchmark in which other currencies are measured against, as Sir Issac Newton would have it?
Unfortunately, the US dollar has done a very poor job since 15 August 1971 when the gold window was closed by president Nixon. Then the dollar was worth 0.8857 grams of gold. Now the dollar is worth only 0.017 grams of gold, which is a devaluation of a staggering 5143%. If that is not a definition of ‘currency manipulation’ then what is?
Wasn’t it Connelly who said “the US dollar is ours but its your problem?”
It is clear who has been the currency manipulator since 1971 But I don’t expect it to be clear to those who choose to turn a blind eye to it.
written by Brandon Smith , September 23, 2011
@Realist
You don't seem to understand how Forex markets work.
China isn't manipulating the Dollar. It is manipulating the value of the Yuan COMPARED to the Dollar by purchasing U.S. debt instruments and stocking their forex reserves with Greenbacks.
The U.S. is also a "currency manipulator", through its dysfunctional fiat treasury purchases and debt monetization.
You need to think bigger. This isn't about taking sides between China and the U.S. They are both ultimately pawns in the game of globalism.
written by Realist , September 24, 2011
@ Brandon
You don’t seem to understand how US laws work.
Under Section 3004 of Public Law 100-418 (22 U.S.C. 5304) the Treasury Secretary is required to analyze twice-yearly the exchange rate policies of foreign countries, in consultation with the IMF and to consider whether countries manipulate the rate of exchange between their currency and the dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.
According to you china “is manipulating the value of the Yuan COMPARED to the Dollar by purchasing U.S. debt instruments and stocking their forex reserves with Greenbacks.”
But this is at variance with the Treasury’s Report on International Economic and Exchange Rate Policy, which had determined in all its findings from since 2006 to 2011 that China did not manipulate its currency.
This is because China’s stable exchange rate could not be labeled as manipulative any more than Hong Kong or the Gulf States or Malaysia’s previous peg could be termed manipulative, because manipulation involves willful, proactive volatile changes to profit from temporary technical market trends against market fundamentals.
Further, it is simplistic to define China’s “purchasing U.S. debt instruments and stocking their forex reserves with Greenbacks” as a form of ‘currency manipulation’.
If this is true then why are countries with high US dollar reserves, such as Japan, Taiwan, South Korea, Singapore, Saudi Arabia, the UAE, Qatar, the UK , France and Germany, not at the cross-hairs of Section 3004 of the Public law 100-418?
Some misguided folks in the US Congress also wrongly vilified China’s currency peg to the US dollar as a free lunch for China’s economy at the expense of US trade deficits.
This has no merit because any currency peg can broken by the market as has happened to many currencies around the world, including the British pound’s peg to the German mark, which was broken by hedge fund speculator George Soros in 1992.
(Will Switzerland’s recent currency peg to the euro be breached? The jury is still out.)
Stanford economist Ronald McKinnon argued in an April 24, 2006 op-ed piece in the Wall Street Journal that China’s motivation for pegging the yuan was to secure monetary stability rather than achieve an undue mercantile advantage in world export markets.
He pointed out that persistent Chinese trade surpluses and US trade deficits reflect mismatches in saving in China and the US, an imbalance that exchange rate changes can only mask but cannot correct. He concluded that. “China is not a currency manipulator.”
You further claimed that “The U.S. is also a "currency manipulator", through its dysfunctional fiat treasury purchases and debt monetization. “
Surely if this is true, then the cure is for Congress to repeal the Federal Reserve Act of 1913 and revert to the US constitution which allows only Congress to “coin money” in the United States.
In reality for decades the US had been manipulating the exchange rate of the dollar downwards, through tax and trade policies as well as the FED’s deliberations on interest rate moves, after defaulting against the world’s major central banks by reneging on the explicit agreement at Bretton Woods to peg the US dollar to gold at US$35 an oz, and causing gold prices to spike from US$35 an oz in 1971 to US$1800 an oz in 2011, a verifiable devaluation of the US dollar by 5243 % against gold.
This was, mind you, despite an announced “strong policy” starting from Treasurer, Rubin in the Clinton era to Snow in the Bush administration and now Geithner in the Obama administration.
And as anyone can see a strong dollar policy itself is an example of ‘currency manipulation’ and it has failed as the dollar index has fallen to historic lows.
The US also maintains an Exchange Stabilization Fund (ESF), which is money available to the US Treasury primarily for participating in the foreign-exchange market to maintain currency stability, instead of leaving to the vagaries of market forces. If that is not defined also as a form of ‘currency manipulation’ then what is?
According to a GAO report, in the 2008 GFC, the FED loan out US$16.1 trillion to banks in the US and around the world including non-bank entities like Toyota ostensibly to prevent a systemic crash of the “too big to fail” banks and a stock and bond market crash.
Tell me where does the FED get the authority to print US$16.1 trillion and lend to these banks and non-banks entities when its mandate is to control inflation and create jobs in the US? Did that reckless action not affect the exchange rates of currencies around the world? The TARP, QE1 and QE2 were also a form of 'currency manipulation.
Lastly, in the opinion of experts, the mother of all ‘currency manipulations’ is none other than the largely unregulated Hedge Funds. The combined turnover measured in notional amounts of interest rate, equity index and currency Derivative contracts increased from $429 trillion in 2006 to an astounding level between $800 and US$1000 trillion today. What will happen to Planet Earth when the Derivative dung hits the fan?
Is it any wonder that the Derivative market has been described as a ‘Financial Weapon of Mass Destruction’ and yet no one is taking away the punchbowl anytime soon. Compared to that potential financial Armageddon, the alleged 'currency manipulation' by China is just small beers.
written by Brandon Smith , September 24, 2011
@Realist
Are you REALLY trying to use the Treasury exchange rate analysis as "proof" that China is not a currency manipulator?
Again, you reveal your ignorance and lack of knowledge when it comes to the workings of forex markets, and, you sound a lot like an establishment troll spewing standardized talking points that we get to hear daily on MSNBC.
The Treasury is no more a reliable source of transparent information than the Federal Reserve, or the IMF, for that matter.
Also, the GAO report on Fed liquidity is a sham, because it is not based on a FULL AND COMPLETE audit of the fed balance sheet. Even economic laymen know this.
In fact, no one knows how much the Fed has actually injected into foreign or domestic markets since the derivatives crisis began. Whether you believe the Fed is a currency manipulator or not, the bottom line is that no one who actually knows anything about central banks or real economics actually quotes Fed generated numbers.
Of course, the Treasury will eventually label China a currency manipulator, when it suits their political interests to do so, but not before then. I expect to hear such talk openly in the next two months, especially with the latest announcements that they will be enacting trade enforcement actions against China this year.
China forex investments DWARF all of the countries you mentioned in comparison except Japan (which has used currency manipulation more frequently this year to artificially devalue the Yen), though it is still a distant second. Its laughable that you would try to mix those countries together as if they had anything in common with China in terms of forex levels or treasuries investment.
Next, I could really care less about the "opinions of experts" on anything, let alone hedge fund operations. Being that you quote from the GOA and the Treasury, your definition of an "expert" is obviously highly naive. The derivative "dung" has already hit the fan. Why do you think China and the U.S. is so desperate to hyperinflate and manipulate currency values as damage control?
Finally, you didn't read my entire post, did you? Again, you try to make this about China vs. the U.S. As I said before, you need to look at the bigger picture. BOTH China and the U.S. are currency manipulators. Stop trying to peddle your false paradigm.
It has become clear that you are either a highly gullible first year economics student who believes every stat he reads on the Federal Reserve website, OR, you are a shill quoting establishment drivel despite previously clarified discrepancies in an attempt to initiate an endless circular debate. In either case, I honestly don't have time for you.
written by Johnny Jarvis , November 05, 2011
The big threat is China secretly buying gold directly from mines and not reporting it until much later. This way they can stockpile tons of gold cheaply and not affect the markets and cause prices to skyrocket. As they continue to stockpile gold to one day back their currency with it they also continue to horde huge amounts of US currency from running hundreds of billions a year trade deficits with us. They are already and even preparing more to take these piles of US paper to buy US land and businesses. This way they collect Gold, buy a new country to solve their population problems and businesses to import and export wherever they want in the world to keep their stranglehold on the world markets with their products. It doesn't help that the have the largest espionage campaign in the world taking place stealing all our technology and secrets through their student spies, visiting experts, and businessmen. They are in all levels of our universities, corporations, military contractors and government and what they can't get to from the inside they hack from the outside. We need to have some laws drawn up that ban foreign land ownership in the USA like many other countries have.
