Tuesday, September 22, 2009

China and Treasuries - A Puzzle

Perhaps some readers may think that I am obsessed with China as, once again, China is the central subject of this post. A long while back I speculated on what China might do as the current economic crisis unfolds (yes, it is still in full swing). The basis of my speculation was quite simple; I simply thought about what actions I would take if I were in the position of China.

My first thought was that it would be vital to move reserves out of the $US, which would mean offloading treasury positions. I was unsure at the time about how this might be achieved without spooking the entire market, and destroying the value of the remaining holdings. As it was, the exit method is relatively simple and involves shifting holdings from long term debt into short term, and simply not rolling over the existing debt. It turns out that China has been making this shift for some time, but remains a net buyer of treasuries:
For instance, the report showed huge central banks such as Japan and China remained buyers of U.S. assets. China's holdings of U.S. Treasuries rose to $800.5 billion in July from $776.4 billion in June.
The same report showed a net outflow of capital from the US, and this makes the ongoing purchase of treasuries by China ever more curious. Of particular note is a recent article in the Shanghai Daily, which will reflect the official government 'line'.
AS the global economy appears headed toward recovery, concerns are growing that the United States' addiction to massive fiscal stimulus as an economic panacea could eventually lead to an even bigger crisis - a loss of confidence in the US dollar.

Nobel Prize-winning economist Paul A. Samuelson raised the specter of a "truly global financial panic" if countries funding the US deficit, particularly China, decide their investments in US Treasury securities are no longer safe.

Warren Buffett warned in The New York Times that side-effects of the current fiscal intervention could be as dangerous as the financial crisis recently averted - in the form of inflation eroding the dollar's purchasing power.

Preserving the dollar's strength has importance far beyond protecting American tourists from the shock of paying the equivalent of US$25 for a hamburger in London or Tokyo.

Economic experts are concerned about the dollar's health for a number of reasons. Most importantly, the scale of current trade and spending imbalances puts heavy downward pressure on the dollar's value over the long term.

The US imports far more goods and services than it exports, flooding international markets with dollars and undermining their value.
The Chinese 'line' on the $US and the actions of China contradict one another. The standard explanation for this is that China simply can not afford the destruction of the $US, as the two economies are tied inextricably together. Such an assertion would suggest that China sees a future in which it just continues to fund US consumption forever. When the switch into short term debt is considered, this is simply unbelievable. One way or another, China knows that it must move off the treasury treadmill. Why they have not already done so remains a puzzle, but they must begin a retreat soon. In particular, the $US slide seems to be gaining momentum, with Geithner's remarks on the future status of the SDRs as a reserve asset pushing the decline further:
The Dollar Index, which the ICE uses to track the dollar against the currencies of six major U.S. trading partners, dropped to as low as 75.915, the weakest since Sept. 22, 2008, before trading 0.2 percent down at 75.944.
One explanation for the weakness of the $US is that economic recovery is providing an incentive to move into higher yielding assets. This from Bloomberg:
The dollar fell to a one-year low against the euro and weakened versus the yen on speculation the global economic recovery is gathering strength, encouraging investors to buy higher-yielding assets.
A contrast to this explanation was issued a few hours before this post, and comes from China's Xinhua news:
The Fed began its two-day monetary policy meeting on Tuesday and would announce rate decisions on Wednesday. The central bank is widely expected to leave key rates unchanged at historic low level, and its statement after the meeting would be fundamentally same with previous statements.

If the statement is in line with expectations, it means that the Fed would keep its ultra-loose monetary policy for a while, increasing pressures upon the dollar. Any unexpected signal could spark big fluctuations in currency market.

It was reported that U.S. is proposing a broad new economic framework to tackle global economic imbalances on the Group of 20 financial summit due later this week. The framework may lead to weakness in the dollar, analysts said. It prompted investors to take profit from the greenback's gains in previous sessions.

It is very clear that the line in China is that it is US profligacy putting pressure on the $US (a view shared by myself). It is very clear that, if Chinese news sources are following the official government line (the normal practice), the Chinese government has concluded that a $US fall must take place. This makes the ongoing purchase of treasuries ever more puzzling.

I did speculate that perhaps, just perhaps, China is hoping that the US will reverse the current policies (in particular in the face of Chinese complaints). However, the more I thought about this, the less probable it appeared to be as a credible explanation. There has been absolutely no indication from any arm of the US government of any indication of any reversal of current policy. Unless there have been some substantive assurances given behind closed doors, it appears highly improbable that China might hold any hopes for change.

Another line of reasoning I followed was that China simply does not want to be seen as the country that 'pulls the trigger' on a $US collapse. Once the crisis takes hold, they will be able to stand back and suggest that they did all they could to support the world financial system - despite US profligacy. Once again, however, I am not entirely convinced with this argument. Compared with the diplomatic gains, the potential economic losses make this appear to be a very poor trade off. I am also not convinced that China would be that concerned with such niceties, as they will in all cases be able to point to their requests for responsibility from the US and their patience when the US continued to devalue their assets.

The last line of reasoning I considered appears to be the most probable. It is simply that China's wealth is indeed denominated in the $US, and they are just doing enough to hold the $US from free fall. The reason is that this allows them time to use the $US, which they are still accumulating in large quantities, to prepare themselves for the post-$US world. Returning to the speculative post in which I imagined what I might do if I were China, I suggested that they would also diversify their holdings into commodities (in particular gold), other currencies, and would continue and accelerate their purchase and control of commodity/resource companies.

With regards to gold, it is now no secret that China has been purchasing gold (600 tons - though are now planning to buy domestic production of gold), and also other commodities (though there are some suggestions that this is easing back). There are also hints that China is going to restrict supply of some of their own key commodities, which will support a growth in high tech industry. Also, with regards to securing access to resources, China appears to be accelerating a process that had already started at the time I made the speculative post. A friend kindly pointed me to a recent article in the FT on this subject:

China’s sovereign wealth fund is deepening its holdings in commodities by investing about $850m in Noble Group, a Singapore-listed commodity shipping and trading company with deep roots in China.

In the past two years, CIC has shifted its emphasis from dollar investments in financial firms, including Blackstone and Morgan Stanley, to investments in commodities groups and hard assets including real estate.

With regards to currency, the $US 50 billion purchase of SDRs is one form of diversification, and perhaps ties in with the ambition for the RMB to displace the $US as the reserve currency. My aim here though, is not to restate my arguments for why the RMB might succeed, though yet further signs can be found of the ambition in action:
[regarding the purchase of $50 billion of IMF SDRs] But the agreement stated that China will pay the IMF up to 341.2 billion yuan ($50 billion), also known as renminbi, for the SDR bonds, based on the Aug. 25 exchange rate [...]

But Zhang also noted several other, more intriguing possibilities about how the IMF could harness the yuan soon to end up in its hands.

It could use yuan to buy assets from other financial institutions or for issuing loans, hence spreading the Chinese currency more widely.

"This would signify that the renminbi, to a certain degree, would replace the dollar as a global reserve currency. It would be an important impetus for renminbi internationalisation and it would have a negative influence on international demand for the dollar," Zhang wrote in a research note.

What all of these points are driving to is that China might be just providing enough support for the $US through bonds to prevent a free fall of the $US. The motive might be that they are using the time of instability to prepare for a post $US world, and are seeking to position themselves to ride out the storm that would follow a major fall in the $US. It is no more than speculation, but they may simply be preparing for the troubles ahead, whilst their $US have some use and value.

So far, so interesting, as they do appear to be following the most logical strategy for a country in their current position. However, I also speculated previously about the next step in the strategy over and above the points I have already mentioned. In particular, if the $US falls dramatically, and there is plenty of speculation on this end emerging in the mainstream media recently, what would China do in this situation?

My argument was that China would, as soon as a $US rout looked realistic, sell hard and fast into the market, and seek to recover as much value from the $US holdings before hitting the bottom. I speculated that they would likely have a contingency plan in place, including a floor at which they would stop selling and hold. In the event that this kind of scenario took place, the US economy would go into severe shock, along with the institutions of government. No doubt, just as China has prepared for this contingency, I am guessing that the US is likewise prepared. My guess is that they will have a plan to stem the tide, but also that they will be playing the role of King Canute.

In the economic aftershock, China will still be left with significant holdings of US assets. In some respects, these will be of little value. However, my speculation is that this would provide a vital element in China's bid for economic ascendancy. In particular, they could use their new found economic strength to go on a shopping trip in which they would seek to purchase leading US companies, and in particular companies with leading edge technologies. The economic position of the US government will be so dire that they will seek any form of an infusion of capital and overseas currency into the country, and will not be in a position to block any Chinese moves on US companies, with the sole exception of industries that are directly related to the defence sector.

In this scenario, China might be able to jump up the technology ladder at a rate that would otherwise be impossible. It would facilitate the step up the value chain that is necessary for China to achieve economic super power status. This from a recent Xinhau news article, in which they report on the Chinese Premier, Wen Jia Bao, as suggesting that the economic crisis presents risks and opportunities:
China has the capabilities of taking over the commanding heights in the fields of economy and science and technology, said the premier.

He highlighted the importance of choosing the correct new and strategic industries that can play a supportive role for the country's current economic and social development. China must master key technologies, otherwise, the country might be controlled by others, he stressed.

Wen said that China needs industries that have broad prospects, consume less energy, have a larger impact on other sectors, offer more jobs and make more money. "We must select and develop new and strategic industries with an international view and strategic thinking," he added.

A total of 47 academicians, professors, experts, entrepreneurs and industry leaders attended the meeting and gave their views on the issues of these new industries.

It is very clear where China's ambitions are directed and they simply reflect the ambitions of most countries. The difference is that China is increasingly moving into a position where those ambitions might be achieved.

As with my original post, the one in which I speculated on China's actions, I can only speculate here, and would emphasise that it is no more than speculation. There are a few problems in the argument, such as why China might undermine the $US with negative statements, if they seek to prepare for a post $US world, and need the $US for preparation. This appears to contradict the argument, and can not be explained. Many elements of my previous speculation have been enacted by China, but they are nevertheless still net purchasers of treasuries, against my expectations. It may be that I am missing something, but I have yet to find any explanation other than the one that I have suggested here.

As ever, and in particular with such a speculative post, comments and thoughts are welcomed. Perhaps there is a more mundane explanation?


  1. China's Holdings of Gold: Some Facts

    China's holdings of gold have certainly increased recently, but this needs to be put into perspective. As of April 2009, the top five gold holders were:

    (1) the United States (8,134 tons),
    (2) Germany (3,413 tons),
    (3) the International Monetary Fund (3,217 tons),
    (4) France (2,487 tons),
    (5) Italy (2,452 tons)
    (6) China (1,054 tons)

    Does China’s Buying Gold Signal a Shift in Forex Policy?

    Moreover, the crucial statistic is whether China has increased its holdings of gold as a percentage of its overall foreign exchange reserves.

    It hasn’t. In fact, it has declined:

    China's gold reserves are worth almost $31 billion -- about 1.6% of its total foreign- exchange reserve holdings, and gold as a percent of the country's total reserves has actually declined since 2003, according to Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter .... [and] consider this: Even after the large increase in gold holdings, China's holdings of gold as a share of total foreign-exchange reserves are well below the world average of over 10%, according to Mark O'Byrne, executive director at Gold and Silver Investments Ltd.

    China's gold buy raises eyebrows for all the right reasons

    So even after buying all that gold, it has actually fallen as a percentage of China’s foreign exchange reserves.

    Rumours that China will buy 403.3 tonnes of IMF gold reserves are unconfirmed, but even if China bought all 3,217 tons of the IMF’s gold reserves this would still only amount to about 5.25% of China’s total foreign exchange reserves.

  2. Addendum on China and Gold

    I should have added that the facts about China's holdings of gold actually decreasing as a percentage of Forex reserves make it unlikely that the RMB will become a
    "gold standard" reserve currency any time soon.

  3. Your are right to be on "China Watch", whether your speculation is right only time can tell. It is my thesis that at present few governments really have much idea of what they are doing. If China is one of the few that have some understanding, and as it is very big, then we all have to worry. As HG Wells put it, "In the country of the bline the one eyed man is King."

  4. You are right to be on "China Watch" whether yor speculation is right only time will tell. As few governments seem to really know what they are doing, but China is one that does have a functioning strategy, then it will have a major advantage, as well as the siz of its economy and the strength of its reserves.

  5. Does China really have a cunning plan, or is there a huge debate going on behind the scenes about what to do? All factions might agree on a few points - buy commodities now, buy US high-tech firms at fire-sale prices later - but surely they will be as confused and conflicted as anyone else about how to realise the most value from their $ holdings - or rather how to lose as little of the value as possible.

  6. China’s Money Supply backed up by Gold?

    An additional calculation puts China’s holdings of gold in perspective. At the end of August 2009, China’s money supply as measured by M2 was 57.67 trillion RMB = US $8.44 trillion.

    China's gold reserves in 2009 are worth about US $31 billion.

    This means that there is enough gold to convert just 0.37% of China’s money supply into specie.

    In 1885, at the height of the Classical gold standard, about 34% of the UK and US money supply was backed up by specie (gold or silver).

    So for a Classical gold standard to work in China (where about 34% of the domestic money supply was backed up by gold), China would need $2.86 trillion US in gold reserves!

    Since it is estimated that all the gold ever mined would equal about 158,000 tonnes (which is about US $4.78 trillion), , China would need more than half of all the gold in the entire world, just to back up 34% of its current money supply.

    The libertarian idea of a global return to the gold standard, without an astronomical jump in the price of gold, is ludicrous.

  7. Lord Keynes:

    Gold holdings, even if not at par value, give credibility to currency. They constitute a 'real' reserve of value, and a check on printing money.

    As you know, I am not a proponent of the gold standard, but anything which stop seignorage has to be better than the current situation. As such, any link of a currency to gold offers a check on the kind of lunacy that we are now witnessing.

    As the QE policy reaches its inevitable climax, the credibility of any currency that links to gold will rise.

  8. Gold and the Money Supply in the US and China

    Gold holdings, even if not at par value, give credibility to currency. They constitute a 'real' reserve of value, and a check on printing money.

    But, then, that would suggest that the US dollar is a safer currency than the RMB!

    China's holdings of gold haven't stopped the Chinese money supply (as measured by M2) expanding by 28.53% over the past year to US $8.44 trillion.

    The current US money supply as measured by M2 is about $8.3 trillion, but the US has more in gold reserves:

    (1) the United States (8,134 tons or US $239.2 billion = 2.88% of M2 backed up by gold),
    (2) China (1,054 tons or US $31 billion = 0.37% of China’s M2 backed up by gold).

    The US actually has a higher percentage of its money supply backed up by gold than China does. So investors should have more confidence in the US dollar.

    As such, any link of a currency to gold offers a check on the kind of lunacy that we are now witnessing.

    But neither China nor the US has any such link.

    In the US, the convertibility of the US dollar into gold was suspended by Nixon in 1971.

    In the absence of the direct convertibility of the currency to gold by a central bank, gold reserves these days simply do not prevent expansion of the money supply.

  9. I urge caution when discussing sovereign gold reserves as many western central banks (led by the US) have 'leased' their gold reserves out for years, some argue to keep its price artificially low and maintain the greenback as a global reserve currency.
    When central banks do this their stated reserves do not change because they count IOU's from bullion merchants as physical reserves. So whilst the US may say it has over 8000 tons, how much bullion does it have in its vaults? The other big question is will the central banks ever be able to redeem the IOU's and get back their gold?

    Also I sincerely hope that Mark will be attending the BoE crisis meeting:

  10. The U.S. plan in the event of China playing a blinder such as you suggest, would be (is): declare a New Dollar, all old dollars out of play. Simples! And I imagine they are very ready to implement just such a plan; if they are not, they are guilty of dereliction of duty. You don't think China knows this, having had it explained to them by the Fed, which might explain their "strange" behaviour?

    And China is teetering on the brink of collapse, their economic statistics consisting largely of lies.

    The Chinese Miracle is a chimera.

  11. Cynicus

    I have been enjoying your blog for a good few months now, but occasionally as I do today feel frustrated with the pre-occupation with the USD. There are many sites out there evaluating the impact of these actions on the US economy but not many give a UK perspective. You might be in an ideal posiition to map out this kind of 'what-if' scenarios for a UK reader.

  12. Lord Keynes:

    Have I said that either currency is convertible?

    What I am saying is very simple. China is preparing to internationalise its currency. It is buying huge amounts of gold. I am simply spectulating that they might seek to peg their currency to some kind of gold standard to add credibility. I am not saying that they are doing so now.

    The point about pegging to gold is that, if enacted, it offers some kind of surety of not expanding the money supply without constraint. If the RMB is being positioned as a new reserve currency, this would help achieve credibility.

    It is not a necessary condition of RMB reserve status, but would serve to bolster the position.

    The current gold reserves do not determine the safety of a currency, but the rate of issuance in relation to the underlying economy. We are currently still in a fiat system. That does not mean that a commodity based system might not be enacted, and that the currency that pegs to a commodity would likely have credibility.

    Also, modern thinking on commodity standards seeks to link a currency to a basket of commodities, rather than a single commodity. Inevitably, gold is an important component of such a basket, and would be a key component of the system.

    If I am correct, and the $US collapses under the weight of unchecked issuance, then the next reserve currency would benefit from any means to demonstrate that it will be constrained.

    China clearly believes the $US will collapse. Why would they not learn the lessons of the $US, if they wish to replace it with a credible alternative?

  13. Anonymous:

    I will be returning to the UK for the next post. You are right to remind me of my primary focus, but it is difficult not to consider the big picture.

    Other Anonymous:

    I agree that it is **possible** that the Chinese economy might be a 'lie', and often contemplated some underlying problems in my early posts on China. However, they appear to be riding the storm at the moment, and they appear to be preparing for the coming hurricane. If there is a $US collapse, they will also go into a crisis, but they appear to be in a position where they will be able to ride it out, and come out stronger.

    Perhaps it is all a lie? However, their export machine is still churning out goods, they still have huge surpluses, and they are accumulating resource rights at an astonishing rate.

    Whilst there may be some problems in their economy, I think many countries would like to be in their position. However, if at any stage their economy goes into reverse, then there are real risks of violent unrest. In my early posts, I continually made this point. I now see this as far less likely, but do not discount the possibility.


    Thanks for the comment. I am aware that there is some controversy over the real state of the reserves, but have never had the time to familiarise myself with the details.

    However, I saw an excellent interview with some gold experts in which two experts were 100% in agreement that gold prices were manipulated by central banks. They simply differed on the motive.

    We are now in a curious situation in which, if they seek to manipulate the price downwards, the central banks will simply sell their gold to the Chinese at artificially low prices. In principle, this might constrain their actions.

    As I have pointed out in previous posts, China is increasingly the key player in many markets.

  14. Lord Keynes,

    You seem to believe government holding of gold figures as many believe other government statistics such as the true level of government debt, real productive GDP (not consumption) measures, and true inflation.

    The fact is that western central governments have leased their gold reserves to the now bankrupt banks who have subsequently sold it all in attempting to suppress the price of gold to support the value of their state currencies. Why else do you think that say the FED has never been audited and Bernanke states it would be damaging to do so under Ron Paul's bill?

    Also, your argument that based on China's gold holdings the gold standard cannot return is in fact the reason why the gold price will increase astronomically when QE is extended and or western governments will have nobody willing to lend them money appart from their domestic banks using government gilts (debt) as reserves to lend back to the governments even greater amounts of cash.

    Once China calculates that the goods they sell to us and the USA will not be paid for at a profit due to the QE dilution of western currencies, that is when they will stop buying US treasuries (if not sell them writing off loses on goods they have already sold to us) and will allow the RNB to inflate.

    We are very near to this western economy hyper-inflation financial colapse scenario irrespective of how much deflation we continue to have in our property and stock market fiat paper valued assets.

  15. Reply to George

    The fact is that western central governments have leased their gold reserves to the now bankrupt banks who have subsequently sold it all in attempting to suppress the price of gold to support the value of their state currencies.

    Where is the hard evidence for that?

    Also, your argument that based on China's gold holdings the gold standard cannot return is in fact the reason why the gold price will increase astronomically when QE is extended and or western governments will have nobody willing to lend them money appart from their domestic banks ...

    It's already been noted that governments manipulate the price of gold. If vast central bank gold reserves flood the open market, that would send the price of gold down, not up.

  16. Reply to Cynicius Economicus

    Capital account convertibility is widely regarded as a prerequisite for any currency becoming a reserve currency.

    You may have dealt with this in another post, but how do you see China overcoming this problem?

  17. Lord Keynes,

    In your reply to my comment, you have justified the hard evidence. The governments manipulate the price of gold down to preserve the value of their increasingly diluted paper currencies BY SELLING GOLD (how else?) via leasing arrangements through banks and the gold 'paper' futures markets, perhaps even selling 'gold' that no longer exists in their vaults.

    Once the state solvency crisis of no more treasury bill / gilt buyers soon takes over from the bank credit crisis, and gold options become due, the gold price will increase 10 fold irrespective of whether 'gold grams' officially becomes the new world currency.

  18. For those interested in central bank gold leasing the following links may be useful:

    A thought provoking article (2005) investigating central bank gold reserves with figures taken from the World Gold Council website:

    A 2006 article on gold lease manipulation:

    A 2008 article with lots of links:

    And two more up-to-date articles (2009) I just found on the same:



    Finally an old one from the Economist but I am not a subscriber so cannot read it:
    Fool's gold. (gold leasing) (Finance)
    The Economist (US) | March 17, 1990

  19. I recommend the excellent blog of the Post-Keynesian economist L. Randall Wray:


    It has great analysis of monetary theory and recent economic issues.

  20. Good points CE, one thing you haven't noted though is that with a falling dollar the RMB rises in value which makes up for the losses in Treasuries over time.
    As of now Chinese people need to work several times longer than an American to earn the same amount of a given natural resource. Once the RMB rises in value we'll face much stiffer competition.

  21. Good Evening Cynicus, top work fella.
    I've been following your site since the wheels came off the economy last year - The Bear Stearns implosion signified the start of the meltdown for me.
    I'm currently living in Sydney but have assets in GBPounds and HK$ where i lived previously. Whilst we seem to have dodged the recession bullet here exchange rates for me have been the biggest issue due to the strength of the AUS$.
    The reason for my reply here is to ask whether the fact that the HK$ which is pegged to the US$ (about 7.79 from memory) would be in the mind of Mainland China when it comes to potential currency manipulation of the US$.
    After all Hong Kong is where East meets West and is the cornerstone of trade for the region and a place the Mainland prize highly.
    I'm probably totally out my depth on all these geo-political thoughts but as a BBC (British Born Chinese) business colleague once said to me.......

    'They will cut of their nose to spite their face'

    Hope thats not a racist comment...delete if not appropriate i'm not here to offend anyone.



  22. I have been following your blog for some time and agree with you on fundamental points(gdp view,real wealth,function of money), but with this post I think you are blundering.
    In my personal view there is a great game being played between America and China, but it is America that writes the script and China simply has to play along out of its powerlesness, all this media hype serves only to suggest otherwise.
    First, the fundamental and underlying point to understand is that Chinas rise is the result of transfer of american scientific knowledge to China. The transfer was possible through no other way than by decreasing arbitrary value of american knowledge. Slave labour,no welfare,no health,safety and environmental regulations,protectionist policies - this is the comprehensive competitive advantage package of China. This resulted in America being flooded with cheap goods which was good news but only in the short term. Now America seeing long term effects on its economic selfsufficiency and power does not want to continue down the same path by giving away remaining knowledge.
    In my opinion America will continue to push China to keep financing its economy as long as it gets, since China is not in position of power(they never came up with technological breakthroughs). China is amassing more treasuries in the hope one day they will be able to buy with them the remaining high tech industries from US companies. But the treasuries in whatever form do not have value in themselves. They have value only in relation to concrete goods and services whose value is rooted in the value of knowledge that created them and the value of knowledge is set arbitrarily (from the position of power). Whatever treasuries China will amass they will only reflect the value of goods. Since the value of goods was decreased by the comprehensive competitive advantage package of China consequently all treasuries have lost their value- dollar,us bonds,sdr you name it. They simply do not have value in themselves but only in relation to real goods, not so difficult to understand I think. To put it bluntly the value of the us currency and its vast multitudes of derivatives was lost due to massive surplus of labour in China.Gold will not help since it has no other purpose than a currency. If you back up money by gold because there is not enough goods backing up money then what goods are backing up the gold? It is like backing up one debt by another! By the way, credit to Lord Keynes for detecting your ignorance about gold constituting a real reserve of value. The only reserve of value is knowledge which

  23. is materialized in goods and services and which is not devalued by proliferation. The SDR strategy is part of Americas game. As you rightly observed China is in fact financing SDR and it happens with US knowledge. It is simply in US interest to keep China financing US economy, so they shifted to a different channel - SDR, because dollar lost its shine. They simply renamed the debt and China thinks it has finally something of value in their hands. But the underlying principle remained - the value of SDR is not being backed up by high value goods and services. So Chineses are getting only another hope in the form of SDR which is about as valuable as US dollar. What China can do is to multiply the technology they alreade have from the West , what I mean is that they can start building more factories, infrastructure and services in their own country thus empowering the remaining 1 billion people. The only restriction they face in accomplishing this massive task is limits on natural resources, hence they are aggresively pursuing commodities all around the world and at the same time building the military means to protect their interests if need be . An act not being ignored by american military strategists. What I would do in the place of America is that I would keep inventing channels throu which China will finance America as long as China hopes against hope. The moment China gets it, it will stop its foolish game and will simply write off bad debts.I personally think this is the way Chinese (now able to enjoy fruits of western science) are paying off their debt to american citizens who were betrayed by their corporate and political leaders who empowerished their own nation and endangered national security for short term gains. However, I am afraid such a huge event will not happen without anger and a possible clash between the two. What lesson America can learn from it is that free trade and proliferation of technologies is not the way towards economic and military power.

  24. Meanwhile in other news, according to South Florida Business Journal, from a a survey by careerbuilder: 'more Americans are living paycheck to paycheck'

    ...and there is a serious year on year trend in the numbers..'61 percent this year...49 percent last year and 43 percent in 2007'

  25. Paul Krugman has an excellent piece on financial deregulation and Gordon Brown's role in it as a major cause of the 2008 meltdown:

    Brown bought fully into the dogma that the market knows best ... There’s no question that this zeal for deregulation set Britain up for a fall. Consider the counterexample of Canada — a mostly English-speaking country, every bit as much in the American cultural orbit as Britain, but one where Reagan/Thatcher-type financial deregulation never took hold. Sure enough, Canadian banks have been a pillar of stability in the crisis.

    Gordon the Unlucky http://www.nytimes.com/2009/06/08/opinion/08krugman.html


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