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.
Nope.
But as a non-American, I’m not actually expecting you to actually read accurately.
:D
I’m afraid I agree more with agere_contra’s point of view. The major stumbling block to our manufacturing capabilities is the massive tax and regulatory burden we place on them. Crashing the service economy by raising the prices of every thing we import would not suddenly make manufacturing in the United States profitable.
That must have sounded so cool in your head.
As must your accusation I want to raise the cost of everything in America by 10%.
Do you want to discuss this, or fling accusations?
From what I can tell the Business Schools are releasing Anti - American goBULLists on our economy. Eliminating ALL regulations and taxes in the manufacturing sector wouldn't slow this suicidal charge of off shoring to slavery...
Wrenching back to the thread: its evident that the days of the dollar’s reserve currency status are numbered.
Eagle Diesel (shale gas) is going to make a huge difference to America’s finances -and will save America - but too late to save the reserve status.
This may not be altogether bad news. Losing reserve status will at least force the Federal government to reduce spending and live within its means.
Better than the thinking you do with your posterior.
You’re advocating 10% tariffs on all imports.
You don’t think prices will go up?
Much better. Thank you very much.
I believe costs will increase, but an important other thing will also happen. Two important things in fact:
The entire corporate system, will note that America is serious about protecting American (and relocate-to-American as well) producers, who actually work right here.
That will be a massive change. It will initiate a return of US businesses, right here to the USA.
The other good thing will be, we can begin to pay down what is now a truly staggering foreign debt.
17 trillion dollars? Are you flipping serious???
Look China just overtook America this year, as the world’s largest exporter.
That is a massive change.
Bring back industry to America. Now.
Free Traders get so upset when you go against their religion...
Helpful and accurate.
Everyone who constantly repeats the tariff and “bring back the jobs” mantras need to start a small business somewhere making something ubiquitous that is now imported.
With so many people unemployed, many of them engineers and financial services people, it stands to reason that _some_ of them would have, by now, taken their expertise and started a domestic business. Likely, many have tried. Perhaps a few have succeeded, only to discover the huge target they now have on their backs.
About all you can do these days is buy yourself a job, either making something or providing some service that can’t be exported. But you need to have no employees, use nothing that could be classified as a chemical, be located remotely and use as little water and energy as possible in the process.
China is inoculating the world against the Black Plague infecting America.
The way to end the world of Obama is to destroy him. That is just what they are attempting.
Be prepared to ride out the coming inflation in tandem with the Obamacare night mare
Revelations on a China Thread? Puhleeze!
Explain to the thread why Texas is doing better than California.
One State has more regulations and taxes, and one has less. Businesses are flocking to one State, but are fleeing the other.
Part of the genius of the American system of states is that it forces competition in Government. And we can all see the results: Texas is doing well whereas California is going bankrupt.
If taxes and regulations make no difference to capital, why is capital flocking to Texas?
Wait aren’t you the guy that said domestically there is no competition possible? That tariffs would just raise prices and domestic manufactures would simply collude with each other in price fixing? You are very inconsistent. I thought true competition came from across borders, domestically not so much. So which is it?
Look to be fair Texas is doing better than California because Texas is much freer than California.
However America is currently getting screwed, by imports.
We need to bring back industry to America.
Whether to Texas, or California is indeed a very important issue to discuss, but keep in mind that sending jobs to China doesn’t help anyone except the leaders of a few huge industrial interests.
Bring back jobs.
To Texas, or California, or any of 48 other states depending on your own preferences.
But bring back jobs to America.
I think it is safe to say, we all are afraid of just that.
Ping
Bring back MADE IN AMERICA.
What genius said this? You're a real economic Einstein.
Bump
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