3/22/09 China Gets Conned

Precious Metals Market Analysis, By Michael Pennington (Copyright 2010 Pennco Coins)

When you perform work or provide services for a debt-wracked spendthrift you should have a pretty good idea that their IOU’s are never likely to be honored, and are thus not likely to be worth the paper they are written on. The Chinese have been supplying the United States with vast quantities of consumer goods for years in exchange for Treasury Bills and Bonds. These instruments are a form of IOU, and the Chinese have been slowly waking up in recent months to the fact that they “have been had”. They recently broke out in a cold sweat as they realize that they have in effect been conned out of trillions. Thus they have been attempting to scale back their purchases of US Treasuries in an effort to stop throwing good money after bad, and have been accumulating more gold. This has increasingly threatened to pull the rug from under the Treasury market. The Chinese (and others) are in a “catch 22” situation with regard to their vast holdings of US debt, as if they make any serious attempt to divest themselves of it in significant quantities they will collapse the market. They are therefore to a large extent stuck with it – all they can do is drastically scale back purchases and try to offload as much of it as they can clandestinely. However, the reduced demand resulting from their change of stance has nevertheless been threatening to bring down the Treasury market. The Chinese are going to lose big time, and last week the Fed decided the manner of their losing. They won’t lose as a result of falling Treasury prices – at least not for now – they are going to lose due to a severe devaluation of the dollar. The big danger to the Treasury market and to the United States by extension is that the Chinese and others put two and two together and, realizing they are about to be fleeced by a falling dollar, decide to cash in for what they can get ahead of the dollar collapse. This would cause the Treasury market to collapse rapidly, and the Fed, having last week “thrown down the gauntlet” would find itself having to buy up Treasuries not just to the tune of a few hundred billions of dollars but by the trillions, all the extra money created for this purpose rapidly feeding through into the economy as a hyperinflationary meltdown. If they don’t buy the unsold Treasuries their price will plummet causing interest rates to spike to levels that would almost immediately bring the hugely indebted US economy to a dead stop. Since we know how their minds work – they take the path of least resistance – we know that they are going to create as much money as it takes to prop up the Treasury market, happy to push the ultimate cost of this on to the man in the street in the form of massive inflation or even hyperinflation.

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