Saturday, September 19, 2009

How China Will Destroy The U.S. Dollar

How China Will Destroy The U.S. Dollar

Giordano Bruno

Neithercorp Press

On August 23rd, 2009, we reported on a Chinese “People’s Daily” article which revealed that China had begun the process of dumping its long term U.S. Treasury bonds. 3.1% in a very short period of time. To the main stream educated wannabe economist, this may not seem like much, and the news may roll off his back. So, it is up to Neithercorp to educate them on why this recent dumping of treasuries is such a big deal.

First, it has been nine years since China has dropped so many U.S. bonds in such a short period of time, and interestingly, it was right around this time that the U.S. Dollar value began to plummet, with a short upwards spike in 2006, and then a continued drop until now.

Dollar Chart

As you can see from the chart above, overall value of the U.S. Dollar compared to other currencies has faltered significantly in the past decade.

People who do not understand the significance of U.S. debt held by China often argue that China held less treasury bonds a year ago than they do now, so a 3.1% sell off is nothing to write home about. Their problem is that they are not looking at the big picture when making this assessment.

In the past, the U.S. deficit has been a cumbersome, but seemingly manageable affair, at least in the eyes of foreign investors. This changed with Barack Obama’s recent announcement that the U.S. deficit over the next ten years is now projected at $9 Trillion. As with all figures negative to the Government, this is a conservative estimate. The true figure will probably end in the double digits, which is a disaster for the American economy, simply because this kind of debt is completely unconquerable. Our current annual GDP is $14 trillion and falling. Around 70% of America’s economy is supported by the retail and service sector, which are also continuing to lose strength as the current recession drags on. This means that our GDP is getting smaller while our deficit is exploding. Soon, the national debt will be as large or larger than our entire GDP.

Based on these fundamentals, no economy can sustain itself. Due to this massive projected deficit, a comparison of all past Chinese holdings of T-bonds is irrelevant. The only possible way for the U.S. to continue on this path now is through foreign investment in Treasury Bonds. China is one of the few countries which has the national savings necessary to purchase our debt on such a scale. We NEED China to continue not only buying treasuries, but buying them at an ever increasing rate as each year passes. There is no way around this. However, as reported by the “People’s Daily”, China has not only stopped buying U.S. bonds, they have begun dumping the bonds they have already accumulated!

Hopefully, the gravity of this situation is starting to set in with any “green shoots” economists out there who still have blind faith in the dollar.

Some may argue that it is not in China’s best interest to dump treasuries because such a move would hurt their economy as well. This is an assumption based on nothing, as I will show.

In the past, China has used a favorable trade deficit between themselves and the U.S. to fuel their economy. Chinese labor is cheap, their goods are cheap, and they can be exported to the U.S. (the largest buyer of Chinese exports) for little additional cost……as long as the Greenback remains strong, that is. If the dollar were to drop in value against the Yuan and other currencies, China would lose its trade deficit advantage, its exports would become more costly, and its current industry would collapse.

This is why China has continued to buy U.S. Treasuries and prop up the dollar far longer than was rationally prudent. Keeping the greenback strong versus the Yuan meant China would be able to keep its export economy going. Until recently, China needed us as much as we need them, but this has changed.

Americans are no longer buying Chinese goods like they used to. Chinese exports have dropped consistently month after month, in some cases as much as 26%:

While it is difficult to gage China’s unemployment numbers because of the Communist Government’s knack for misreporting statistics even more often than we do here in the U.S., it has become evident from China’s college graduate suicide rate that jobs are simply not available:

So, China’s exports continue to plummet, the U.S. dollar continues to plummet because of inflation created by the privately controlled Federal Reserve, and the U.S. deficit continues to expand, further threatening any recovery.

The bottom line: China has nothing to gain any longer by investing in U.S. debt.
Their exports are falling anyway, and the dollars they already hold are losing value as I write this. China’s export economy is changing, which is probably why in December of 2008, the Chinese central bank announced a “baby step program” to begin allowing international trade using the Yuan, instead of the U.S. dollar:

And why China has been stockpiling gold since at least 2003:

The Chinese government has even recently begun encouraging gold and silver investment in its average citizens, an unprecedented move!

China Gold

China is obviously moving to protect itself, slowly leaving behind its reliance on export markets and focusing more on its own citizens and currency as a potential driving force for its economy. Again, though it is gradual, China is breaking away from the U.S. This will likely move faster as the year of 2009 closes out, perhaps as soon as the G20 meeting this September in Pittsburgh, where it is rumored that BRIC countries may openly announce their intention to move away from the U.S. Dollar permanently and into the IMF’s new “Special Drawing Rights” (Global Currency):

It is inevitable. Because China has nothing to gain by continuing its economic relationship with the U.S. they WILL drop the dollar, and this will probably occur soon. As this begins to happen, main stream media here and across the world will shrug off the whole affair as nothing out of the ordinary. China’s treasury dumping will go from 3.1%, to 10%, to 20% and beyond. Other countries, including Japan with its new anti-dollar government, will follow suit like a chain of dominoes. The dollar will lose most of its value and stagflation will commence, while the average American investor, blissful in his imaginary field of “green shoots”, won’t even see it coming until it is too late.

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