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Japan's utter panic was summed up by Akio Mikuni, President of the ratings company Mikuni & Co. when he suggested that "Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession". For good measure.."The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes drastic measures to help bail out the U.S. economy"
China's Central bank governor Zhou Xiaochuan announced that it will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta and exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations. His tongue in cheek explanation?
"The US dollar is unlikely to be stable next year and later. And the likelihood of the United States issuing more money in the near future adds to the depreciation risk in US-dollar-denominated assets and trade settlements." Source
A previous report describing China's proposed 7 fold increase in Gold reserves is also indicative of its gradual pullback from the doomed dollar.Gold has been slowly rising as investors, previously struck rigid with fear, are now taking a breath and looking at real value. The old adage of Gold being a safe haven is coming back in to play and no amount of gold price manipulation on the exchange is going to change that. With China's announcement of its intention to build up it's reserves to 4000 Tons, we can expect other Treasury Note holders to be thinking along the same lines. This can only lead to a bullish gold market and a collapsing market for Treasuries. Treasury Note doomsayers are a growing community amongst which we can count former Bank of England policymaker, Willem Buiter, who summed up his position thus
"Even the most hard-nosed, Guantanomo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed"
And Barrons is announcing a coming Treasury Bubble Pop..
"Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating."
Forbes is predicting China's future diversification of it's reserves as Treasury Bills become more of a liability..
"Washington's issuance of mountains of debt to bail out the U.S. economy will only make T-bills less rewarding, putting the dollar's future strength in question. Various economists are saying it will be in China's interest to diversify in the near future."
We can discount the unexpected strengthening of the economy in 2009, but inflation has to rise once those trillions are in the playing field and the dollar will be toast. Bonds, yielding next to nothing, don't exactly present an attractive investment opportunity. The only reason Treasuries have been so attractive up to now was that they were presumed to be a safer harbor than equities, commodities or cash. No amount of "stimulus" plans can fool all the people all the time. After the initial massacre, investors are taking a moment of reflection and taking a more long term approach. We are now in an era of survival and protectionism rules the day.
With the waves of destruction brought about by the Global Financial Meltdown there comes a defining moment of obligatory reflection. If such disaster has been visited upon the Globe, what lessons can be learned to dismantle the mechanism that brought it about in the first place? The remedies proposed by Governments the world over are not working as every real economic indicator confirms. The eternal corrupting influence of Money on Government policies and planning have all but guaranteed that whatever methods are employed to redeem the economy from the whale’s mouth, they will be like drops of rain meeting a river. The one overwhelming factor that does not seem to be factored in to the equation is that to get oneself out of a financial mess one needs financial resources. Not the borrowed kind but the saved kind. This is where China holds an Ace.
The U.S. has a real financial shortfall of $53 Trillion which it can never pay back. The U.K. is on the way to destroying its currency and increase its debt as is France. China, on the other hand, is in a very unique position in that it has $1.9 Trillion in foreign currency reserves. This puts it in a very unique position with regards to the rest of the world. While the latter was absorbed in consuming everything that China produced, the Chinese were amassing an enormous cushion of real cash that they can now use to divert the focus away from an export driven economy to one that begins to focus on domestic demand. The economic fundamentals for a recovery in China are more evident than in the rest of the world because there has not been the same credit driven overconsumption that was the driving force for GDP in so many other countries. Even on an individual basis “Household savings climbed 382.7 billion Yuan from the previous month (October 2008).
The Central Economic Work Conference’s $585 Billion stimulus plan addresses several areas that are essential to increasing domestic consumer demand and purchasing power. Housing projects for urban dwelling low-income families, subsidies for low-income rural families, funds for Medical care and education. China is also supporting the Steel, Automotive and telecommunications industries through lowering taxes and encouraging innovation through research and development subsidies. Imports of iron ore are increasing and the steel produced is being stored for future use. The latter point is notable as it presents China with an advantage in manufacturing baseline costs as the fall in shipping and commodity prices has meant that it has built its stockpile at bargain basement prices. The table below shows the investment in the country's fixed assets.
This is real investment with real available money. China saved up for the rainy day and, now it has arrived, can put their resources to work for them. It will take time for China to turn around its gigantic economy but at least they don’t have to worry about paying off an unpayable debt to the rest of the world. While every other country is desperately trying to formulate a rescue plan fueled with an increase in the national debt, China does not have this worry and this will form its primary advantage.
