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China further tightens US debt noose

debt noose

“Foreign-exchange reserves have exceeded the reasonable levels that we actually need,” Zhou said. “The rapid increase in reserves may have led to excessive liquidity and has exerted significant sterilization pressure. If the government doesn’t strike the right balance with its policies, the build-up could cause big risks,” he said, without elaborating. Source: Bloomberg(1)

In case you missed it, earlier this week China announced that its foreign currency reserves are excessive and that they need to return to “reasonable” levels.

In politician speak, this is a clear, “we are sick of the US Dollar and will be taking steps to lower our holdings.” Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt).

This comes on the heels of China deciding (along with Russia) to trade in their own currencies, NOT the US Dollar. Not to mention the numerous warnings Chinese politicians have been issuing to the US over the last 24 months.

In simple terms, China is done playing nice and is now actively moving out of US Dollar denominated assets. This is the beginning of the US Dollar’s end as world reserve currency.

The dimwits in Washington don’t understand this because their advisors are all Wall Street stooges who don’t think debt or deficits matter. After all, why would they? Their entire business model is now based on endless cheap debt from the US Fed. So it’s only logically (in their minds) that the US as a sovereign state engage in the same strategies.

What does this mean? We’re on out own in terms of preparing for what’s coming. The US Dollar has already taken out its 2009 low in the overnight futures session. We now have only one line of support before the US Dollar breaks into the abyss (all time lows). Source: Zerohedge (2)

Is it all China’s fault?

The popular media mouthpiece opinion is that China is causing much of the world’s woes in regards to trade and manufacturing. You will hear things like the Chinese wanting to bring down inflation and slow their economy, all they have to do is raise the yuan once and for all instead of filling up their bank coffers! Media economists are saying that they are siphoning Western economies and liquidity with an artificially low yuan and then piling up the money in their bank accounts because the economy is too hot. Again, the media trumpets that the Chinese government has no sense of fair play or respect.

The real truth is debt is the problem, not China.

The American government debt is well over $50,000 per American citizen (unofficially it’s in the 100,000’s per person). Western governments seem to think that it’s acceptable to go into deep debt today, cause inflation tomorrow, then repay the debt in the next decade with inflated dollars. China is using intelligent economic practices and refusing to participate in the western government culture of accumulating massive debt then causing inflation to diminish the debt.

If China rapidly increased the value of its currency it would wipe-out all the savings of its citizens and devalue all the American Treasury bills/bonds that China bought. Instead of the West trying to force China to adopt western monetary practices, it’s time for Westerners to adopt the intelligent eastern practices of less debt and more intelligent governments. This is particularly salient because China has just degraded its credit rating of Western countries because of ” ideological bias in favour of the West” by rating agencies like Moody’s who have been under intense pressure to re-think how they determine ratings.

On the same token, the Chinese fixed currency policy is one of the major causes of the current economic dislocation affecting the global economy. The Chinese have to decide if they are part of the world economy or if they are going to shrink back behind the wall. They can’t have it both ways.

How will inflation affect places like Canada next to the USA?

Inflation is caused by QE2. And it affects the whole world because the US dollar is the world reserve currency.

So inflation affects China as well as Canada and other countries except the US.

What is hurting the Canadian economy is the high Canadian dollar, if the Loonie goes 1.1 US, it will kill their manufacturing (it’s already a low of 12% of GDP). That is why China wants to control the Yuan, it wants to protect its exporters.

Canada cannot withstand a high Loonie for an extended period of time. We will not have a manufacturing industry left, there will be no more “Made in Canada” or “Made in USA.”

Not only that, their service industry will be gone too. Since trade is settled in US dollars, it would be much cheaper for Canada to buy US dollars and pay some other countries to do the work for us. We are seeing the effects now, Rogers just laid off several thousand call centre people in Canada and outsourced the jobs to Asia, paid in US dollars.


(1) Bloomberg

(2) Zerohedge

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