The Egg Man
This week a Chinese banking official commented that China held too many dollars in reserve and that perhaps the bank should seek to reduce its exposure. Not surprisingly, the dollar reacted by falling sharply against the euro and Swiss franc and even more against gold and silver. (The greenback gained a temporary reprieve later in the week following dovish comments from the ECB) Bond prices also fell, with yields rising to their highest levels since September of 2004. Of greater concern than the immediate market reaction are the long-term trends that such a policy shift in China will unleash. As the statement reveals not only China's predicament but also America's vulnerability, the remarks should amount to a wake-up call for Americans.
The obvious problem for China is that it can reduce its dollar exposure only by becoming a net seller of the currency. But when the buyer of last resort becomes a seller, who will be there to take the opposite side of the trade? The dilemma reminds me of the following joke about a fictitious egg futures trader:
Ultimately the Bank of China, and other central banks throughout Asia for that matter, will come to their collective senses and attempt to unload their vast quantities of dollars. When that day finally arrives, the real life egg men in Asian will surely take it on their chins, but it will be Americans that literally have it all over their faces. After all, Asians will simply write off some horrible investments and perhaps lament their poor judgment. But once they bite the bullet, their standards of living will greatly improve, as a result of the enhanced purchasing power of their respective currencies. Americans on the other hand, will not be as fortunate, as an end to the free ride on the Asian gravy train will mean a sharp reduction in our standard of living.
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
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Arizona Republic, The Philadelphia Inquirer, and the Christian
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In addition, his views are frequently quoted locally in the Orange