In
order for our current level of debt-fueled prosperity to continue,
the rest of the world must continue to use our dollars to trade with
one another and must continue to buy our debt at ridiculously low
interest rates. Of course the number one foreign nation that we
depend on to participate in our system is China. China accounts
for more global tradethan
anyone else on the planet (including the United States), and
most of that trade is conducted in U.S. dollars. This keeps
demand for our dollars very high, and it ensures that we can import
massive quantities of goods from overseas at very low cost. As
a major exporting nation, China ends up with gigantic piles of our
dollars. They lend many of those dollars back to us at
ridiculously low interest rates. At this point, China owns more
of our national debt than any other country does. But if China
was to decide to quit playing our game and started moving away from
U.S. dollars and U.S. debt, our economic prosperity could disappear
very rapidly. Demand for the U.S. dollar would fall and prices
would go up. And interest rates on our debt and everything else
in our financial system would go up to crippling levels. So it
is absolutely critical to our financial future that China continues
to play our game.
Unfortunately,
there are signs that China has now decided to start looking for a
smooth exit from the game. In
November, I wrote about how the central bank of China has
announced that it is “no longer in China’s favor to accumulate
foreign-exchange reserves”. That means that the pile of U.S.
dollars that China is sitting on is not going to get any higher.
In
addition, China has signed a whole host of international currency
agreements with other nations during the past couple of years which
are going to result in less U.S. dollars being used in international
trade. You can read about many of these agreements in this
article.
This
week, we learned that China started
to dump U.S. debt during
the month of December. Many have imagined that China would try
to dump a flood of our debt on to the market all of a sudden once
they decided to exit, but that simply does not make sense.
Instead, it makes sense for China to dump a bit of debt at a time so
that the market will not panic and so that they can get close to full
value for the paper that they are holding.
As Bloomberg reported
the other day, China dumped nearly
50 billion dollars of
U.S. debt during the month of December…
China, the
largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt
in December by
the most in two years as
the Federal Reserve announced plans to slow asset purchases.
The nation
pared its position in U.S. government bondsby
$47.8 billion,
or 3.6 percent, to $1.27 trillion, the largest decline since December
2011, according to U.S. Treasury Department data released yesterday.
This is how I would do it if I was China.
I would try to dump 30, 40 or 50 billion dollars a month. I
would try to make a smooth exit and try to get as much for my U.S.
debt paper as I could.
So if China is not going to stockpile U.S.
dollars or U.S. debt any longer, what is it going to stockpile?
It
is going to stockpile gold of
course. In fact, China has been voraciously stockpiling gold
for quite some time, and their hunger for gold appears to be growing.
According
to Bloomberg,
more than 80 percent of the gold that was exported from Switzerland
last month went to Asia…
Switzerland sent more than 80 percent of its
gold and silver bullion and coin exports to Asia last month, the
Swiss Federal Customs Administration said today in an e-mailed
report. It imported most from the U.K.
Hong
Kong was
the top destination at 44 percent on a value basis, with India at 14
percent, the Bern-based customs agency said in its first breakdown of
the gold trade data since 1980. Singapore accounted for 8.6 percent
of exports, the United Arab Emirates 7.9 percent and China 6.3
percent.
When China imports gold, most of it goes
through Hong Kong. We know that imports of gold from Hong Kong
into China are at an all-time record high, but we don’t know
exactly how much gold China has accumulated at this point because
they quit reporting that to the rest of the world a number of years
ago.
When
it comes to global finance, China is playing chess and the United
States is playing checkers. China knows that gold is a
universal currency that will hold value over the long-term. As
the paper currencies of the world race toward collapse, China could
end up holding most of the real money and that would be
a huge game changer when they finally reveal that fact…
The announcement of China’s new gold hoard
will send shockwaves through the financial markets, and make China
and the Chinese yuan (their national currency) even bigger players at
the international table.
International banking expert James Rickards
compared it to a game of Texas Hold ‘Em poker:
“You want a big pile of chips. The U.S. has a
big pile of chips, Europe has a big pile of chips. The U.S. has 8,000
tonnes [metric tons] of gold, 17 members of the euro system have
10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000
tonnes, they are a player.”
There are some really good points made in the
quote above, but I do take exception with a couple of things.
First of all, I believe that China now has far more than 5,000 tons
of gold. Secondly, I seriously doubt that the U.S. still
actually has 8,000 tons of gold or that Europe still actually has
10,000 tons of gold.
As China (and eventually the rest of the world)
moves away from a U.S.-based financial system, the consequences are
going to be dramatic.
For
instance, right now the average rate of interest that the U.S.
government pays on debt is just 2.477
percent. That is ridiculously low and it is way below the
real rate of inflation. It is simply not
rationalfor
anyone to lend the U.S. government money so cheaply, and at some
point we are going to see a dramatic shift.
When that day arrives, interest rates are going
to rise dramatically. And if the average rate of interest on
U.S. government debt rises to just 6 percent (and it has been much
higher than that in the past), we will be paying out more than a
trillion dollars a year just in interest on the national debt.
Even
more frightening is what a rapidly changing interest rate environment
would mean for our banking system. There are four large U.S.
banks thateach have
exposure to derivatives in excess of 40 trillion dollars.
You can find the identity of those banks right
here. Interest rate derivatives make up the biggest chunk
of those derivatives contracts. As John Embrytold
King World News just the other day, when that bubble bursts
the carnage is going to be unprecedented…
“Stockman
brought up a brilliant point, the fact that we have hundreds
of trillions of dollars of interest rate swaps,
which are polluting the world’s banking system. If we see growing
volatility in interest rates,
and I think that’s inevitable with what’s going on, that would
cause spasms in the financial system. And if something goes wrong in
the derivatives market, Heaven help us because the leverage that is
imparted to the banking system through these derivatives is
unholy.”
Unfortunately, very few of the “experts”
will ever see this crash coming.
Very few of them saw it coming in 2000.
Very few of them saw it coming in 2008.
And very few of them will see it coming this
time.
I
really like what Paul
B. Farrell had to say about this…
Early warnings of a crash are dismissed over
and over (“just a temporary correction”). They gradually numb us
about the inevitable. Time after time we forget history’s lessons.
Until finally a big surprise catches us totally off-guard. Financial
historian Niall Ferguson put it this way: Before the crash, our world
seems almost stationary, deceptively so, balanced, at a set point. So
that when the crash finally hits — as inevitably it will —
everyone seems surprised. And our brains keep telling us it’s not
time for a crash.
Till then, life just goes along quietly,
hypnotizing us, making us vulnerable, till a shocker like Lehman
Brothers upsets the balance. Then, says Ferguson, the crash is
“accelerating suddenly, like a sports car … like a thief in the
night.” It hits. Shocks us wide awake.
Don’t let the upcoming crash take you by
surprise.
The warning signs are very clear.
Get ready while you still can.
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