Nine politicians in China control the fate of the United States of America.
I’m not kidding. The implications are scary. Let me explain…
These nine men are the Standing Committee of the Communist Party of China. They control the value of China’s currency.
Fortunately, it’s easy to forecast what a politician will do… He will do whatever it takes to keep his job.
The story is remarkably simple…
In China, the goal of these nine politicians is to keep the Communist Party in power. The way to accomplish that goal is for the masses to stay employed. Right now, China keeps the people working by exporting cheap goods. In order to make sure those Chinese goods stay cheap, the Standing Committee sets the currency exchange rate artificially low. And that is the crucial part of the story…
How do these nine politicians keep the exchange rate low? They buy U.S. dollars. Importantly, these nine men don’t just sit on stacks of dollar bills… They invest those dollars in U.S. Treasury bonds.
It’s gotten out of hand. China owns nearly $1 trillion worth of U.S. debt. China’s holdings have increased dramatically every year… They’ve grown nearly tenfold since the end of 2000:
And China’s soon-to-be trillion dollars of U.S. government debt is not the end of the story. It’s the beginning…
In order for other Asian countries to compete with China, they have to artificially keep their own exchange rates low. And that’s exactly what they’re doing. They’re doing it the same way China does… They’re buying mountains of U.S. Treasury bonds, too.
At this point, foreigners now own half of the U.S. Treasuries outstanding (of the ones that are not held by the U.S. government). And they’re buying more… Most importantly, there’s enough demand for U.S. debt from foreigners that the U.S. government can finance its deficits for years to come… all by simply selling Treasury bonds to foreigners.
Would you lend money to the U.S. government at 3.5% interest for 10 years? I sure wouldn’t. I really can’t name anyone who thinks 3.5% in government bonds is a good deal. The foreigners aren’t buying to earn 3.5% interest. They’re buying to keep the value of their currencies down.
India is an interesting example… Earlier this year, when India spent $6.7 billion buying gold from the IMF, it was all over the news. What WASN’T reported was that India bought far more U.S. Treasury bonds than gold. India has increased its stake in Treasuries by over $22 billion since last summer – increasing its Treasury bond holdings more than 200%.
So, yes, there’s a mountain of demand for U.S. dollars – Treasury bonds – from all over the developing world. The important thing is demand will last. It will last as long as the nine men on China’s Standing Committee don’t change their minds.
So what does all this mean?
It means the U.S. dollar will not crash right now.
Most investors believe the U.S. dollar is about to crash. But the facts are clear… The dollar has ready buyers of hundreds of billions of dollars worth of Treasuries. While the dollar might lose ground against gold, the reality is, no other paper currency has a tailwind of hundreds of billions of dollars of buying waiting in the wings like the U.S. dollar does.
Eventually, the dollar bears will be right. The U.S. will have to face all its debt one day. But that story is not in my True Wealth Script for 2010.
Good investing,
By Dr. Steve Sjuggerud
We have an Ace or two to play, we can bring the production here (which would be a good idea as far as our safety, we may die from lead otherwise), & we can stop buying so much of their junky junk – we don't need it, it pollutes, depletes, it's madness really. & it's time to fatten our savings accounts again, since we can't rely on our banks, government or jobs much. We need to withdraw slowly though, it could be WAR otherwise. There is more of them than us don't forget – it was never smart to strengthen them to begin with from that standpoint.
This "China scenario" is much more simple than most of you, including the author, are making it. First off, just to put things in perspective, that mental moron sitting in the White House just had 11 trillion in debt created. China's 1 trillion dollar "note" just got deflated big time. Their biggest concern is that the ignorant Americans won't continue to buy their crap.
They need us more than we need them. It's really just that simple.
Howard, i don't think China needs to cook the books with 2 billion motherboards p/a from only one factory – and there are quite a few factories. I don't know about over there, but here in S.A. GWM's vehicles aren't exactly low class or under-selling, either. Maybe if your presidents cleared up the New World instead of pushing a New World Order, they could afford the Order to go with it….
Go to a basic economics class you idiot. Look around you, what major purchase do you have that is manufactured in China. In my house there is no major appliance manufactured in China. That is because China make cheap product because they have cheap labor and low technology. Yeah they solder PC boards together but they don't manufacture memory chips or micro processors. STOP BLAMING CHINA FOR OUR PROBLEMS AND STOP SAYING CHINA CONTROLS OUR DESTINY. IT MAKES YOU LOOK CRAZY!!!!! We could bankrupt the whole Chinese steel industry by just recycling our junked cars. 900 million Chinese live in abject poverty. They are not the threat to our country. China has a whole host of internal problems that they have to face and frankly I do not believe the economic information coming out of China for one minute. I think that they are cooking the books for the country and their economic output and it is just a matter of time before the __it hits the fan. They will be happy they have T-bills when that does happen.
Oh god another doomsday pronosticator. Please just shut up. The reason the Chinese buy Treasury bills is because they ARE A GOOD INVESTMENT. Otherwise they could use our dollars to buy British pounds, or Deutschmarks. They hold lots of dollars because they sell lots of products here in the US and we pay in dollars not worthless Chinese yuan. If the Chinese did not peg their currency to the dollar it would be worthless. They hold dollars and dollar valued investments (Treasury notes) because if they didn't their economy would fall apart.
Other than keeping the value of their currencies down, isn't there motivation of gain from a stronger US dollar?
i still feel america is pretty smart as they dont give a damn about their currency i.e. continue printing so the people have money to spend and enjoy a good std of living. at the end of the day, no country would sell off their US treasury bonds so why should they worry. on the other hand china's 9 men have to work very hard at keeping the economy going and slowly raising the std of living of its 1.3 billion people. frankly i dont know who is the smart ass. i think nobody really can tell?
Mao Tse Tung once said you don't have to defeat a country militarily, it can be done by defeating the economy. I believe he is correct. We're wasting too much money fighting terrorists around the world and currently solving nothing. The Chinese seem to be doing much better in trading with Asean because it is free trade.
If one takes note, Chinese tend to talk to other countries without preconditions or threats. So, it is understandable why China's economy is improving. We want China to increase their yuan while here, we don't want to increase interest rates. Chinese people aren't excactly fools.
In short, the once soveriegn USA is now China's "bitch"!
who's fault is it? China or American ?
When these nine men realize that they are better off keeping the finished goods inhouse for their own citizens, they will stop hard pegging their currency to the USD. That means they dont really need to buy US debts. By letting Yuan to appreciate against the USD, they are handing more purchasing power to chinese people who in turn will spend it on the goods they themselves produced. This way not only the jobs would still exist in China but their standard of living improves as well. The nine men would be the happiest of all to have made this happen. And as far as the US is concerned, they are preparing diligently to drown in their own debts for years to come.
you hit the nail right on the head………….. Their are 2 main factors that could cause a forced change to this dynamic and that is (1) a continuing escalation of protectionism by the west, bringing the threat of a trade war too close for comfort for the Chinese and (2) Insistence by the majority of the G20, upon a new trade currency policy, or in essence a new trade currency altogether separate from any existing unit. This would also stabilize these crazy run ups in Gold by speculative forces. Lets face it, Gold is way overpriced as it is, and all indications are that this ongoing nonsense in the worlds currencies, has to change and a new Global exchange unit be approved. I see this as a definite for 2011 but not this year, although the rhetoric will ramp up as the waters get tested. When the key players in China join in the debate, that will be the "sign" for real change.