that's cause they are waiting for it to bite them in the azz...
Posted on 11/23/2013 7:25:46 AM PST by IbJensen
China just dropped an absolute bombshell, but it was almost entirely ignored by the mainstream media in the United States.
The central bank of China has decided that it is “no longer in China’s favor to accumulate foreign-exchange reserves”. During the third quarter of 2013, China’s foreign-exchange reserves were valued at approximately $3.66 trillion. And of course the biggest chunk of that was made up of U.S. dollars.
For years, China has been accumulating dollars and working hard to keep the value of the dollar up and the value of the yuan down. One of the goals has been to make Chinese products less expensive in the international marketplace. But now China has announced that the time has come for it to stop stockpiling U.S. dollars. And if that does indeed turn out to be the case, than many U.S. analysts are suggesting that China could also soon stop buying any more U.S. debt. Needless to say, all of this would be very bad for the United States.
For years, China has been systematically propping up the value of the U.S. dollar and keeping the value of the yuan artificially low. This has resulted in a massive flood of super cheap products from across the Pacific that U.S. consumers have been eagerly gobbling up.
For example, have you ever gone into a dollar store and wondered how anyone could possibly make a profit by making those products and selling them for just one dollar?
Well, the truth is that when you flip those products over you will find that almost all of them have been made outside of the United States. In fact, the words “made in China” are probably the most common words in your entire household if you are anything like the typical American.
Thanks to the massively unbalanced trade that we have had with China, tens of thousands of our businesses, millions of our jobs and trillions of our dollars have left this country and gone over to China.
And now China has apparently decided that there is not much gutting of our economy left to do and that it is time to let the dollar collapse. As I mentioned above, China has announced that it is going to stop stockpiling foreign-exchange reserves…
The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.
It isn’t going to happen overnight, but the value of the U.S. dollar is going to start to go down, and all of that cheap stuff that you are used to buying at Wal-Mart and the dollar store is going to become a lot more expensive.
But of even more importance is what this latest move by China could mean for U.S. government debt. As most Americans have heard, we are heavily dependent on foreign nations such as China lending us money. Right now, China owns nearly 1.3 trillion dollars of our debt. Unfortunately, as CNBC is noting, if China is going to quit stockpiling our dollars than it is likely that they will stop stockpiling our debt as well…
Analysts see this as the PBoC hinting that it will let its currency fluctuate, without intervention, thus negating the need for holding large reserves of the dollar. And if the dollar is no longer needed, then it could look to curb its purchases of dollar-denominated assets like U.S. Treasurys.
“If they are looking to reduce these purchases going forward then, yes, you’d have to look at who the marginal buyer would be,” Richard McGuire, a senior rate strategist at Rabobank told CNBC in an interview.
“Together, with the Federal Reserve tapering its bond purchases, it has the potential to add to the bearish long-term outlook on U.S. Treasurys.”
So who is going to buy all of our debt?
That is a very good question.
If the Federal Reserve starts tapering bond purchases and China quits buying our debt, who is going to fill the void?
If there is significantly less demand for government bonds, that will cause interest rates to rise dramatically. And if interest rates rise dramatically from where they are now, that will set off the kind of nightmare scenario that I keep talking about.
In a previous article entitled “How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System“, I described how China could single-handedly cause immense devastation to the U.S. economy.
China accounts for more global trade that anyone else does, and they also own more of our debt than any other nation does. If China starts dumping our dollars and our debt, much of the rest of the planet would likely follow suit and we would be in for a world of hurt.
And just this week there was another major announcement which indicates that China is getting ready to make a major move against the U.S. dollar. According to Reuters, crude oil futures may soon be pricedin yuan on the Shanghai Futures Exchange…
The Shanghai Futures Exchange (SHFE) may price its crude oil futures contract in yuan and use medium sour crude as its benchmark, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.
China, which overtook the United States as the world’s top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.
If that actually happens, that will be absolutely huge.
China is the number one importer of oil in the world, and it was only a matter of time before they started to openly challenge the petrodollar.
But even I didn’t think that we would see anything like this so quickly.
The world is changing, and most Americans have absolutely no idea what this is going to mean for them. As demand for the U.S. dollar and U.S. debt goes down, the things that we buy at the store will cost a lot more, our standard of living will go down and it will become a lot more expensive for everyone (including the U.S. government) to borrow money.
Unfortunately, there isn’t much that can be done about any of this at this point. When it comes to economics, China has been playing chess while the United States has been playing checkers. And now decades of very, very foolish decisions are starting to catch up with us.
The false prosperity that most Americans are enjoying today will soon start disappearing, and most of them will have no idea why it is happening.
The years ahead are going to be very challenging, and so I hope that you are getting ready for them.
You have to understand that Free Trade is a religion taught in EVERY business school in the country.
The Chinese have sold off a small amount of US debt over the last two years. They are down from their peak holdings....Yes this is known but now they are trumpeting it I guess
Doesn't sound very suicidal to me.
I blame the unions because of the extremely fat cats at the head of each. With each humongous rise in wages and benefits inflation rose to meet those raises.
I also blame the CEO imbeciles who treated the unions as children and caved in each and every time to the demands.
A great example of this was the UAW and GM at the time that the communist Walter Reuther was killed in a plane crash on his way to the UAW resort in Michigan. Leonard Woodcock became his replacement. The auto contract was up for negotiations in order to renew. GM execs decided that since they’d have to deal with Woodcock they needed to make him look good, so they caved very quickly and granted everything.
So, you see both sides are to blame, but the big problem now is how to roll these excesses back.
You are not paying attention: unions workers account for only 10% of the manufacturing workforce. You are fighting the last war...
Yeah, the real question is why they chose to trumpet/make official what they were already doing for sometime.
imho because of sharply rising oil production — & slowly falling US demand for oil—the pressure is on the dollar to rise. The QE’s are supplying downward pressure on the dollar—which keeps the dollar relatively stable —but whenever the QE’s come off — the dollar will rise sharply.
That means the value of China’s dollar reserves rises.
How can it be? Obama is on track to increase the federal debt by 87% by 2016...
Obama is on track to increase the federal debt by 87% by 2016....
..........
well yes , since the beginning of his term.
debt for fy2013 at 680 billion was still astronomical by historical standards. But the decline in the deficit from the year before was also astronomical by historical standards.
Just as stock market prices are valuations of future earnings — so also is the value of the dollar a valuation of the future economy—and the future of federal tax receipts — of the USA.
Both are looking very rosy.
You just can’t underestimate how profoundly significant for the USA the oil and gas fracking revolution is.(Hint, the USA has been steadily defunded since the 1970’s. We are in the very first years of a major major decades long turn around)
The Chinese essentially quit lending the US money several years ago; if anything, they’re lending us maybe $100 billion per year.
Regarding the Federal deficit - the national debt a month ago (after the latest budgetary can-kick) was $900 billion higher than it was the same date a year earlier.
Lastly, the last time the Federal government balanced its budget (on a fiscal-year basis) was during the Eisenhower administration. It nearly balanced one time in the late 1990’s, but has run a deficit EVERY SINGLE YEAR since about 1957.
How long can it go on? If as much money goes into the stock market as goes out (a simplification I know) the feds collect the capital gains taxes and the stock market stays stable. It seems that interest rates on savings would have to stay near zero to keep that balance, so the feds have to keep printing money.
Can this be a new normal which can be stabilized?
You forgot the part where all the other countries put tariffs on anything we export, like food, chemicals, natural gas, heavy equipment etc etc...
You seem to think American would lose in such a face-off.
America imports a massive amount of production, that other countries make.
Not the other way around.
We have given and sold American manufacturing out from under our very own selves.
America makes virtually nothing now.
Bring back American jobs. If it takes a trade war to get things balanced back out again.
I say let’s start. Now.
that's cause they are waiting for it to bite them in the azz...
Because trade wars never lead to real wars right?
Well we’re being railroaded right now.
What exists now, will lead to a real war.
We do not stand up for American industry. Ever.
A trade war is a real war. And we are not fighting.
Probably so. Lolly gagging along in ‘I wonder’ mode.
All of the Dubai Airshow orders were for civilian airliners and the engines for them.
We have a large number of jobs available in this country right now.
What we don't have is a workforce trained and willing to do them.
We have idiot "guidance counselors" pushing kids into worthless four year degrees along with parents doing the same thing.
A two year degree in a technical college can get one far further ahead in many cases.
I partially agree with you. Just look at what Obama has “accomplished” in the last two years (leaving aside his record prior to that). It wipes away any advantage most U.S. manufacturers would gain from an across the board 10% tariff.
My own experience in manufacturing is that ON AVERAGE you’d need 50 to 100% tariffs to truly level the playing field. I know some will say that can’t be, but if you take a truly honest look at what it would take to build an “All American” car from the minerals & such up to a finished product, even assuming the components manufacturers were in place in the US and running large volumes, well, that’s how it works out.
Another consideration is that to obtain the production efficiencies needed to even have a chance at competing, you have to highly automate, which means you don’t generate many jobs. Indeed there is much discussion of this conundrum, including here on FR. I’ll be the first to agree that we need to bring a lot of manufacturing back to the US, even if some here, like CNN, would disagree with me on how to accomplish that. The problem for employment is that the net result is few jobs added.
Also one must keep in mind that in many cases the most effective foreign manufacturers are themselves highly automated, in some cases with equipment and facilities that are jaw dropping. If you doubt this, go visit a major cold forged parts plant. The US has NEVER had plants anything like those, to produce such parts.
The real problem with tariffs, though, is that they are essentially a hidden tax.
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