Posted on 06/29/2009 4:49:43 PM PDT by FromLori
Immobilienblasen has noticed a rather curious tendency for China to overpay in "China Inc." Deal Premiums. What exactly is that all about?
Well, imagine you had a bunch of money... err... US dollars for example. You've also got a bunch more of these US dollars coming in daily. You don't believe they will hold their value. So you don't really want them. That is quite a problem.
The first trick is to get rid of them... without actually seeming to get rid of them. The second trick is to get rid of them in such as way as to not destroy their value.... yet.
The single best way to do this of course is to use your US dollars to buy hard assets. This looks "normal". It isn't nearly as obvious as "diversifying" your currency reserves. China is doing exactly that. The "China recovery" story is nothing of the sort. The Chinese demand for commodities is not a function of economic growth but rather a function of hoarding. There are Consequences to this Phantom Commodity Bull Market which will become apparent soon enough.
China has been buying into oil with size and at a premium. This has analysts puzzled:
"Sinopec’s offer is equivalent to $34 a barrel of proved reserves and $14 a barrel of proved and probable reserves. The African transaction average in 2007, when the average crude price is similar to current prices, was $14.40 a barrel for proved reserves and $9.90 for proved and probable reserves, respectively. On a proved basis, the 2007 average suggests $3.1 billion total value for the deal. Therefore, $7.2 billion implies a 135% premium."
But when it becomes obvious to investors the world over that a US dollar devaluation is the only possible way to manage the kind of debt burden the US has accumulated, those premiums will vanish instantly. Oil quoted in US dollars could easily make new highs beyond $147 in such a scenario. China will not only have safe guarded the wealth of its citizens by owning oil fields, but will also have increased the global political power of the country thru the acquisition these strategic assets.
While the US empire has stumbled and is desperately trying to avoid a faceplant, the Chinese have taken the opportunity to break out into a sprint. Even in a best case scenario where the US pulls off a miraculous recovery, valuable ground will have been lost and the global balance of power will never again be the same.
China Reiterates Call for New World Reserve Currency (Update4): "China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar.
“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.
The restatement of Governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, reduced holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by $23.7 billion to a record. “Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong.
President Barack Obama needs the support of China as the U.S. tries to spend its way out of recession. The Dollar Index that measures the currency’s performance against six trading partners fell as much as 0.8 percent to 79.779 at 1:11 p.m. in London. U.S. Treasuries were little changed with the 10-year yield at 3.53 percent."
I’ve been dumping US dollars for hard assets in 7.62x39, .223, and 9mm. Can’t forget the Ag, either.
As long as oil continues to be priced in dollars, I don’t see how buying oil with dollars is dumping dollars.
Isn’t the Maine state motto Liberty or death?
And remember the object is to make the other guy die for his country.
Live Free or Die- New Hampshuh
They are buying strategic commodities, metals, etc like they are getting ready for a war.
I suppose after all
You said — As long as oil continues to be priced in dollars, I don’t see how buying oil with dollars is dumping dollars.
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It’s the same thing that you hear about citizens in countries where inflation goes crazy. They get paid in currency, but they don’t hold onto the currency. They go out and buy anything and everything they can, even what they don’t need. They may have four brand new TV sets in the house, because the TV sets will hold value better than the currency.
So, the Chinese are buying these oil fields with currency they expect to devalue and devalue very rapidly and greatly. But, the oil field won’t devalue. Hence, what they buy at a “premium” now, will look like a very shrewd bargain, when the dollar collapses.
Fine and dandy. But you are fogetting one thing...
When you spend money, it doesn’t dissappear. It goes into someone elses pocket and they spend it on something else.
You said — When you spend money, it doesn’t dissappear. It goes into someone elses pocket and they spend it on something else.
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But, that’s not the concern of the Chinese, you see. All they care about is that *they* don’t have those dollars sitting in their pockets. Instead, they’ve got oil fields which then, “hold the value”...
The article was explaining the “why” about the apparent “overspending” now — which will turn into “saving” them a lot of value, in the long run, by having the “hard commodity” in hand, instead of having the “collapsing dollar”...
But that oil they own must be bought and sold in DOLLARS.
For a while yet anyway....
Tell that to the people of the former Rhodesia.
Fiat currency is mere paper with funny green designs printed on it.
Its value can disappear in a frighteningly short time. It can be used to light cigars.
I’m buying copper jacketed lead, gold, non perishable food, paying off debt.
Everyone else is free to do whatever.
You said — But that oil they own must be bought and sold in DOLLARS.
—
Let’s use those TV sets for an example. A family goes out and buys four brand new TV sets with the money that they make. Let’s say they are $100 a piece.
Now, they could have “sat on” he $400 they had, which would have devalued to $200 in a month. But, instead, they bought four $100 TV sets, so in one month that $400 (in TV sets) is now $800.
So, they could have had $200 (sitting on the cash) or $800 in TV sets. They sell all four TV sets next month and get $800 cash and immediately go out and buy $800 worth of food.
Now, would it have been better for them to hold on to the cash, and buy only $200 worth of food next month, or buy and sell the TV sets and buy $800 worth of food next month?
Oil has an inherent value; paper money doesn’t. Get it!?
Oil is the only thing on the planet that MUST be bought and sold in dollars.
GET IT?!
Probably not.
See post 16
Not true.
If I go up to my local oil dealer with a 1 Kilogram bar of gold and ask him to sell me crude in exchange for the bar what do you think he will say?
My guess is, "Sir, yes Sir!"
What you're missing is that today, with gold at $945 an ounce,and oil at $75 a barrel, that 1 kg. bar will get you 443 1/2 barrels of oil.
The problem is, next year, with Obamaflation, that barrel of oil will be $150 a barrel and gold will probably be $1800 an ounce.
Anyone with their cash in a CD earning ~2% will be bent over.
The dollar is toast, IMHO.
He will cash in the gold for dollars and buy the oil. Whatever profit made in the conversion will be kept by him and lost by you.
You’re missing what the Chinese are doing... I’ll get into that, in just a minute. But, let me point out something that you may have missed about this “buying and selling in dollars”.
If you do not want to hold dollars, after getting paid in dollars, you can change currency in a matter of seconds. So, if wanted to hold Euros instead of dollars, you would simply get paid in dollars and in a few seconds, switch that over to Euros. You’re no longer holding dollars.
But, you were the owner of large oil fields, you don’t have to get paid in dollars if you don’t want to. You can get paid in other currency, if you want. There’s nothing to stop you from demanding to be paid in another currency. So, that’s no big deal. Either way, actually (no matter which currency you’re being paid in) it’s no big deal.
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Now, back to what the Chinese are doing. They are trying to get rid of their *huge hoard* of U.S. dollars without appearing to “dump them” — thereby really depressing their value of what they are holding. So, instead, they “dump dollars” in a very sly way. They “dump dollars” in a way that doesn’t appear to be doing so — by buying hard assets. So, that way, they overpay a bit, and when the dollar collapses, they are making out like thieves...
That’s what is going on...
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