Tuesday, February 17, 2009

China Asks the Trillion-Dollar Question

“We hate you guys.” This was the message Luo Ping, director general at the China Banking Regulatory Commission, gave the United States. “Once you start issuing $1 trillion, $2 trillion … we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

“Except for U.S. treasuries, what can you hold?” asked Luo. “Gold? You don’t hold Japanese government bonds or UK bonds. U.S. treasuries are the safe haven. For everyone, including China, it is the only option.”

Yu Yongding, a former adviser to the Chinese central bank, said that China should seek guarantees that its $682 billion holdings of U.S. government debt would not be eroded away by “reckless policies.”

He Zhicheng, an economist at Agricultural Bank of China, the nation’s third-largest lender by assets, stated that such a guarantee would be “one of the prerequisites for more purchases.”

The U.S. has voted to spend trillions of dollars, and the Chinese are the only ones really asking that trillion-dollar question: Where will all that money come from?

Foreigners buy around $200 billion of U.S. debt each year. In 2008, this accounted for just under half of the total $459 billion deficit. The minimum deficit forecast for 2009 is $1.35 trillion.

Somehow the U.S. is going to have to attract a lot more cash if it wants to continue having what it can’t pay for. This will probably mean raising the yield on treasury bonds—giving more interest to people who buy the bonds. This is what China is afraid of. If the U.S. raises bond yields, then all the bonds already on the market will be less desirable, and therefore worth less. The
Telegraph estimates that a 5 percent increase on bond yields could lose China $119 billion. That’s why the Chinese “hate” the U.S.

Recklessly borrowing and spending cash means countries will become more and more reluctant to fund America’s debt addiction. Already China is getting fed up. Soon it may stop buying bonds completely. And when that happens, it is all over for America.

Refs. http://www.thetrumpet.com/index.php?q=5950.4322.0.0


Deu 28:44 (KJV) He shall lend to thee, and thou shalt not lend to him: he shall be the head, and thou shalt be the tail.


US Citizen said...

Yes, this is a troubling prospect. If the new debt instruments (bonds) don't get snapped up by foreign buyers, the USofA could be in for the pain it has been holding off for decades. Better own something you can trade, barter, sell, eat or otherwise "store" value. When the dollar tanks, there will be much suffering. Even if the dollar keeps the "hounds at bay" the inflation that will follow the coming deflation will not be pretty either.

Learn skills that make you less of a specialist, too, 'cause the standard of living may revert back 50 years or so sometime in the near future.

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