Thursday, March 19, 2009

US vs China

Remarks recently by the Chinese government suggesting their investments in US debt may not be as secure as they might like have been reported widely in the mainstream press. However it has taken the commentators on the sidelines to connect Secretary of State Hillary Clinton's visit to China to consider more profoundly exactly what the purpose of her visit might have been. I read an article in goldseek.com that addressed this issue. http://news.goldseek.com/GoldenJackass/1237406187.php
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The suggestion is that massive amounts of money flowing through what are rather broadly described as "Caribbean Banks" (Bermuda and the Bahamas are not in the Caribbean, and neither for that matter are the Florida Keys) are actually secret attempts by the US and the UK to create fictitious purchasers of US bonds to sustain the bond market and keep the cost of US borrowing low. At first blush it seems impertinent for a mere web site to suggest such impropriety by central bankers but we are it seems in a brave new world here as well. We all know central banks screw up, look around! We know governments lie, the list is endless, so combining the too shouldn't be an excessive leap.
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The problem for the US/UK syndicate is that if China finds out is being duped, and who knows perhaps they have, and if China decides to act on that information, confidence in the US and dollar debt will plummet, and to induce people to invest in bonds will require a massive increase in interest rates. Which means inflation for us, and that leads to fears of runaway inflation and devaluation of everything.
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The problem is that the US needs vast quantities of debt to cover debts outstanding, itself an unlikely solution to the overall problem, but the path the government is hell bent on, whether it succeeds or fails, will require creation of lots more debt. If the Caribbean Scam goes mainstream we will not be spared. Already the Fed has announced a buy back of some 300 billions in debt, which is far less than the two trillion estimate dto have been the amount moving through the"Caribbean " banks, and not officially accounted for.
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It is entirely possible China is as aware as the lowly bloggers of the Caribbean Scam, and knows the US is buying its own debt to keep yields down, but China is to some extent stuck in our same nightmare of being afraid to let things fall where they may. The "Too Big To Fail" syndrome seems to affect our debt as well as our financial system. Perhaps China's leaders, busy coping with internal problems that make our tent cities look as nothing, would rather continue the pretense that our bonds are secure. At least for now they will. what happens later we will find out and probably not enjoy one bit.

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