China cancels America's credit card

The public didn't pay much attention to this comment by Congressman Mark Kirk last week, but they should have.

"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.

"I'm not sure too many people on Capitol Hill realize that this is now happening," he said.

It's hard to believe when you consider that China has bought over $1 Trillion of our debt, and the largest single-year purchase was 2008.

But now it appears that Mark Kirk knew what he was talking about.

"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.

"We should track that, because up until last month they were the number one provider of currency to the United States and now they're gone."

The time for that impact is starting already. Recent treasury bond auctions have not gone well.

U.S. debt prices slid, sending the 30-year Treasury bond yield to its highest since November.

"The auction is big news because now it's showing that maybe the Chinese don't want our bonds. If the cost of capital for the United States becomes more expensive, then the recession is going to take that much longer to get out of," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

The old saw of the dollar bulls is "where else will China puts its dollars?" It's sort of like Walmart deciding that it doesn't have to have low prices or quality control because "where else will the customers go?"
It appears that dollar bulls are about to discover the answer to that question that they thought there was no answer to.

For starters, China is buying gold. And not just a little bit either. They bought 454 tonnes of it during the last five years and have shown no signs of stopping.

More than anything, China has been on a worldwide buying spree this year. But instead of buying our debt, they've been buying up natural resources.

The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth. The sheer scope of the agreements marks a shift in global finance, roiling energy markets and feeding worries about the future availability and prices of those commodities in other countries that compete for them, including the United States.

They've also spent $586 Billion on themselves, stimulating their own economy rather than ours.

Adding to that, China has been making currency swap agreements with nations around the world. That means that they will be able to trade with foreign nations in their own currency, and not have to use dollars.

These currency swap agreements happened just days after the Federal Reserve announced that it would be purchasing $1 Trillion in treasuries and agency debt. Of course since the Federal Reserve produces nothing except for paper money, those purchases would be created by creating money out of thin air.
The law of supply and demand is clear - if you dramatically increase the amount of currency in a system without increasing the amount of goods, then the currency is worth less. The Chinese are very familiar with this law, and so they immediately started to make moves away from the dollar. No sense throwing good money after bad.

So "what will China do with all that money?" Plenty. They aren't a captive of our economy after all.

As a region, Asia has created a $120 Billion Asian Monetary Fund - directly undermining the IMF, which has the same mandate. America holds veto power in the IMF, but no power in this new international body. Lawrence Summers and Timothy Geithner opposed this idea as part of the Clinton administration, which shows how much power America has lost during the past decade.

It takes a very long time to change the direction of a market as large as the treasury market. Even the Federal Reserve, with its unlimited printing presses, can only move it slowly.

A deflating bubble

“Confidence in the U.S. dollar is ‘fraying’ and a shift away from the greenback after the financial crisis is inevitable."
- Nobel Prize-winning economist Joseph Stiglitz

At the start of the year I said that the treasury market was a bubble that had to burst. There was no justification for such low yields.
Those who sold their treasuries at that time would have saved themselves from very significant losses.

Since then private foreign investors have consistently been net sellers of our debt. Even central bank buying hasn't been enough to offset it.
There's no secret why that has happened - we've been selling them bad debt.

Without the foreign creditors, and without any real domestic savings, we have no choice to fund our federal borrowing by turning to the federal reserve's printing press.
This also has consequences.

(Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

"Foreign Central banks aren't going to finance much of the 2009 US fiscal deficit; Their reserves aren't growing anymore."
- Brad Setser, Council on Foreign Relations

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Comments

Saturday morning slap in the face

Well, one's thing for sure... my lazy Sat. morn is over. If I wasn't before, I am awake now! Talk about getting somebody's attention. Wonder if the Roman Empire had the luxury of such warnings before its internal economy utterly collapsed? Hmmm,...

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It took Rome 300 years to collapse

I figure we have about 260 more good years to party.

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"Party" v. "Debauchery`

Point taken, Rome`s demise was undoubtedly a long, tortured and drawn out affair. Course, there is a difference between "partying" and abject stubborn debauchery. Debauchery in the sense that some elements of the political and economic elite are hard wired not to accept new realities. They will, at the end of the day, try to keep their "party" of avarice and greed going until... it finally collapses on them!

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Fat Arse

Firstly, welcome to EP and did you know you can create an account, on the upper right hand corner, login? A host of features appears, you no longer have to type in letters to prove you are a human and there is a tracking system so you can see who replied to your comments. I mention it because you are commenting a lot.

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take the money and run

This all saddens me for one bad trade agreement has only been in effect less than a decade and this is the consequence.

This is a fantastic post, you've outdone yourself in overview and detail.

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Looks like China found their hedge.

It is amazing how much China is buying up natural resources. They have been pouring money into Africa and now are doing the same in South America. And what are we doing - deleveraging.

In ten years China will own Mexico.

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Good job, a longer-term worry

This is a good job as always, g.

I don't think Treasuries are going to collapse quickly. A more slow and grinding drip drip drip of gradually increasing interest rates (the mirror image of 1980-2008) seems more likely to me. China might not have liked long-term treasury yields of 2.52% (!), but they are likely to find 4.5% or 5% yields more attractive for now.

I also don't see China doing anything precipitous to bring damage upon themselves, which a quickly collapsing dollar would do. I think they are playing a more subtle, long-term game.

But over the long term, creditor countries rule debtor countries. The US (and I blame Clinton and the democrats for this as well) played a very poor and amateurish game with China over the last 15 years.

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A deflating bubble

not a bursting one.
That seems to be the rule in asset classes that are just enormous. The treasury market will probably decline in much the same way the housing market has declined.
I could see treasuries losing about 20-30% of their value each year for several years.

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This move by China is

This move by China is actually a blessing for all concerned.
It points a way out for the U.S. because we should be devoting our debt to rebuilding our productive capacities
and opt out of the debt-currency roller coaster that we've been on. The old paradigm offered by the present oligarchy is not happening, and China knows it--we need to get the message as well.

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Gregman2, spot on

I agree, its as if we were on drugs and the dealer just gave us a free pass to a rehab clinic. Frankly, I'm not surprised either. You know, this is good that it is happening "sooner" than say at a point where China could do to us what France did to Mexico

.

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The Bank of China was not buying Treasuries from charity ...

... before, and have not "stopped buying" Treasuries as an "attack" now.

Those make for far more dramatic headlines ... but the Chinese have been pegging their currency at a discount on foreign exchange markets for over twenty years now, and this is just more of the same.

When the Chinese were running massive trade surpluses, the normal effect of that would be to run up their exchange rate, which they prevented by creating Yuan/Renminbi and buying foreign exchange with it. That was the official purchases of the US$.

Now, the Chinese have a much smaller trade surplus, as exports have fallen and, with domestic focused stimulus, imports have continued to rise. So the pegged exchange rate is much closer to where the floating exchange rate would be, and there is very little need to buy foreign exchange to maintain their peg.

In the Chinese world, after all, the United States is not the center ... China is.

The big shock was not this last week ... it was several years ago when China shifted their peg from a US$ peg to a peg against a "basket" of currencies. That allows them to shift away from the US$ and into the Euro and/or Yen as their main reserve currencies by a series of very small incremental moves, with no single move dramatic enough to attract attention.

But of course, since understanding that shock requires something more than following headlines, its not something we are likely to hear about on the floor of Congress.

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re: amateur hour

The US (and I blame Clinton and the democrats for this as well) played a very poor and amateurish game with China over the last 15 years.

Actually, "we" aren't even in the game. The allegedly amateurish "U.S." trade representatives put in place by the multinationals that run "our" trade policy are doing their job - which was to facilitate offshoring and make the U.S. the import whore of the world, and to keep it that way until there's no more value to be sucked out of the gutted carcass - by which time other consumer markets will have opened (and are opening), and they can move on. I just find it implausible that at this stage of the game they honestly believe the "benefits of 'free' trade'" propaganda they feed us proles, and are not perfectly well aware that they're destroying this country. They've had a lucrative and mutually beneficial little partnership with China these last few years. They don't work for us.

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Hey, golly gee...ain't

Hey, golly gee...ain't globalism just super dee duper? Which reminds me: Q--what's the difference between an Oral and a Rectal thermometer? A--The Taste. Indeed, all this stuff doesn't taste right...let alone smell good.;-)

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