Good Money After Bad
At a commercial real estate
conference earlier this week, Alan Greenspan downplayed concerns
that the Chinese might sell their significant holdings of U.S.
Treasuries. The former Fed chairman based his opinion not on
the inherent investment merits of Treasuries, but rather on their
lack of them. His confidence stems simply from his belief that
the Chinese have no one to whom they can sell. Furthermore, Greenspan
sees this as a problem for the Chinese and not the U.S.
Most of the debt that the Chinese own is short-term. Therefore all the Chinese need to do is simply not re-purchase new Treasuries when the U.S. pays them for their existing notes. Perhaps Greenspan should rent a copy of the 1981 Kris Kristofferson movie "Rollover," where the fear that Arab countries would not rollover maturing treasuries sent gold prices soaring.
Of course, even if the Chinese decide to cash out, they will be repaid in dollars, for which they will actually have to find buyers. So while Greenspan's contention does not pertain to Treasuries themselves, it certainly does to the dollars in which they are denominated.
China's foreign exchange reserves are now approaching $1.3 trillion which amounts to $1,000 for every man, woman, and child in China. That figure roughly equates to 60% of China's annual per capita income. A proportional foreign exchange reserve in the U.S. would equate to approximately $20,000 per capita, or $80,000 per household. Can you imagine the political outrage in this country if such a sum was extracted though taxation merely to be left idle as foreign reserves? Could you imaging the demands arising from the rank and file on how the government should return such a sum into the domestic economy? Of course if the Chinese keep buying, which they must do in order to prevent the U.S. economy from collapsing, their foreign reserves will likely eclipse $2 trillion sometime in 2008. That would equate to about $140,000 per American household, almost enough to pay-off the average mortgage! This coming from a country, China, whose per capita income is less than $2,000 and whose government provides virtually no healthcare, education, or retirement benefits.
Greenspan may feel that the Chinese have no choice but to continue this lunacy, but to paraphrase PT Barnum: you can't fool all the Chinese all the time. To expect 1.3 billion hard-working, underpaid Chinese to indefinitely subsidize 300 million wealthy, over-consuming Americans is absurd. To paraphrase Winston Churchill: never have so few owed so much to so many. When the Chinese finally wake up the American dream will disappear. I wonder if Greenspan is loosing [losing] any sleep worrying about that!
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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
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In addition, his views are frequently quoted locally in the Orange