Volume 10-9, Jun 16, 2005
China - Dollar Crisis Looming
June 21, 2005
"Financial war is a
form of nonmilitary warfare which is just as terribly destructive
as bloody war, but in which no blood is actually shed... when
people revise the history books... the section on financial warfare
will command the reader's utmost attention."
-Unrestricted War: China's
Master Plan to Destroy America, People's Liberation Army, Colonels
Liang & Xiangsui
A few months ago in my report
"China and the Final War for Resources" I pointed out
that the Government of China realizes that in order for their
country to grow and survive in the years ahead, they must secure
resources, primarily oil supplies. They also view the United
States as a major hindrance to this objective, not only because
the U.S. is the world's biggest consumer of oil but the U.S.
government itself is viewed as being unpredictable, aggressive,
and warlike as far as the Chinese leaders are concerned.
To win this war, the hard line
doctrine taken from the treatise "Unrestricted War: China's
Master Plan to Destroy America" instructs that currency
revaluation or devaluation is a primary weapon which when initiated,
will create financial turbulence and economic crisis within the
U.S. and thus give the Chinese the opportunity to advance their
own version of national security.
In analyzing the precarious
predicament that has $1.94 trillion U.S. Treasury debt owned
by foreign banks, most notably China, the overloaded U. S. debt
burden is already teetering on a fine line. Any hint of a problem
in maintaining support of U.S. bonds would create an instantaneous
meltdown of the greenback with a simultaneous surge in the price
However despite this, the Treasury
Department warned China last month they have until November to
make their exchange rate more flexible or they will be labeled
as currency manipulators. This charge would start bilateral talks
on the exchange rate and possibly retaliatory action.
Currently the yuan is pegged
with the U.S. dollar at 8.3:1 giving China, with its low labor
costs, an excellent trade advantage which both Republican and
Democratic politicians have been strongly complaining about for
the last few years.
I would have to conclude that
these bureaucrats are only looking at the trade imbalance with
China and ignoring the tenuous nature of the important reliance
on foreign debt purchases. As Business Week warned, a
revaluation of the yuan could have other serious repercussions
for the dollar. "With a stronger currency peg versus the
dollar, China would purchase fewer bonds, as would Asian central
banks if they were to cut back on currency market intervention.
And further weakness in the Treasury market with a resulting
bump higher in interest rates, could weigh on the long-gestating
US recovery. In that regard, US lawmakers should be very careful
what they wish for."
Provoking China is a dangerous
game and could have extremely serious consequences not only for
the U.S. economy but the world economy. If China ever pulls the
trigger on their "primary weapon" the dollar will crash
and gold will break $600 in a heart beat and just keep going.
Zhu Min, general manager and
advisor to the President for the Bank of China was quoted in
the China Daily last year saying that: "The United
States is benefiting from China using its trade surplus to buy
U.S. Treasury paper as a reserve currency, along with other Asian
nations. But in the long run, this is not sustainable... China
will focus more and more on domestic demand, which is growing
fast. Then we won't be able to finance the U.S. deficit."
"All Beijing has to
do is to mention the possibility of a sell order going down the
wires. It would devastate the U.S. economy more than a nuclear
strike." -Asia Times, 2004
Last year, the Wall Street
Journal observed that a sell off of U.S. treasuries
from a large debt holder like China would put the U.S. economy
into a tail spin. Long term interest rates would climb and bond
yields would sky rocket. This could start a stampede of selling
which would devastate the stock market. This is the treasury
trap America is in.
In May The People's Bank of
China said it would not respond to a US Treasury report calling
for the central bank to move to a more flexible exchange rate
within six months. A bank spokesman stated that "We have
no comment whatsoever on this. We have made very clear our policies
on China's foreign exchange reform."
China's Premier Wen Jiabao
also weighed in saying China will not bow to outside pressure
on the exchange rate for its currency.
All this rhetoric has gotten
the attention of United Nations economists who have stated that
China has an important role in the world wide economy and recovery.
However in the same breath they also warned that the U.S. had
better reduce its deficit or there could be serious repercussions
not only in the U.S. but globally.
These thoughts have also echoed
an International Monetary Fund (IMF) report that described the
deficit as "perilous" in the long term and poses "significant
risks" to the rest of the world. "The United States
is on course to increase its net external liabilities to around
40 percent of its GDP within the next few years - an unprecedented
level of external debt for a large industrial country."
The bottom line of the report quite correctly forecasts this
current dilemma will create a further meltdown of the dollar.
In light of the U.S. government's
huge and increasing debt load, the politician's aggressive stance
on the free trading issue of the yuan, the need of China and
other foreigners to bank roll the $ 1.9 trillion of U.S. debt,
warnings from the U.N. and IMF about America's out of control
spending - you must wonder what the hell these U.S. bureaucrats
These are serious issues which
I hope you, dear reader, will take to heart. A strategic analysis
of your current equity portfolio would be advisable with emphasis
on real assets in the form of precious metals and energy equities.
No matter what happens in the future at least you will sleep
and night and profits in the process.