Chris Marcus, Contributing Writer For Miles Franklin
Just when you might begin to wonder what could possibly be the latest nail in the coffin of the U.S. dollar, news breaks that China is now publicly considering walking away from the U.S. government debt market.
Last Wednesday Bloomberg reported that, “Senior government officials in Beijing reviewing the nation‘s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries.”
China is currently the largest foreign holder of U.S. government debt. Which is why it would be significant news if China does indeed stop purchasing, or even sell its existing holdings of U.S. treasuries. Keep in mind that the news comes at the same time that the Federal Reserve claims to be stepping away from the market as well. Which raises the question that many have wondered for years, yet still remains unanswered.
Specifically, if the Fed is walking away from the auction, and now the Chinese are doing the same, who’s going to buy all of the bonds?
For those who have been following China’s actions in recent years and buying gold along with one of the market’s largest participants, the news hardly comes as a surprise. In recent months China has continued the development and implementation of its PetroYuan, and now there’s the possibility that they may take their efforts to decouple from the dollar to the next level.
While the Bloomberg article suggests that a final decision has not been made, it’s interesting to consider the factors that Chinese officials might base their decision on.
“The officials recommended that the nation closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world‘s two biggest economies when deciding whether to cut some Treasury holdings.“
If that’s indeed the case, it’s not hard to imagine how this will play out. In Washington lawmakers remain paralyzed to even agree on how much to increase spending, let alone actually make cuts. At the same time political tension between the U.S. and China continues to grow. So while the suggestion is that there is a possible resolution, there’s virtually nothing to suggest that the conditions required for such an outcome will manifest.
Of course if you were expecting the sort of response that one might hope for from a creditor who has been living dangerously outside of his means, consider the broken record response Bloomberg cites from a U.S. treasury official.
“The U.S. Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market,” said Under Secretary for International Affairs David Malpass.“
Obviously this ignores how the perceived ‘economic strengthening’is based primarily on low interest-rate and cheap Federal Reserve credit. It also ignores that, “the Treasury Department said in its most recent quarterly refunding announcement in November that borrowing needs will increase as the Federal Reserve reduces its balance sheet and as fiscal deficits look set to widen.”
A last note is that Bloomberg attached a short video clip to the article in which anchor Tom Keene asked, “if they’re not going to buy U.S. paper, what do they buy instead?”
Rather than suggesting an answer myself, instead I’ll just leave you with the following chart. Which gives a strong indication of one of the primary markets into which China would be likely to reallocate its investment funds.
(chart courtesy of BullionStar.com)
“Harry’s Dented logic” revisited
I believe I have written a couple of times in the past regarding Harry Dent’s “dented logic”. I did so after reading fearful e-mails from holders of gold and silver. Well, Harry Dent is at it again. He has advertisements everywhere, the latest posing as an “article” on Zerohedge where he says gold will be crushed to $700 in a market panic.
He claims a financial and market meltdown is coming to which I wholeheartedly agree because the math not only supports this, it guarantees it at some point. The problem is this, he is trying to scare anyone and everyone he can AWAY from gold by claiming gold will trade to down to $700 and maybe even $250!
First, if gold were to “trade” down to $700, it would solely be traded at that price on paper exchanges and virtually no physical gold would ever change hands at the “exchange prices”. We saw this in 2008 when gold and silver prices were crashed on the COMEX and LBMA. For example, silver was quoted at around $9 an ounce …but the problem for buyers was they could not find much of any real physical silver available for under $15! Before going further, I should mention it is a distinct possibility that paper prices do actually collapse for the simple reason they are only “contracts” and not actually metal. As Jim has long asked, “what is the value of a contract that cannot perform”? The answer of course is zero, and this is exactly where contracts that cannot deliver real metal should approach.
The core flaw to Dent’s logic is that “deflation” will take hold and he claims gold will go down in a deflationary scenario. History does not support this. In fact, “cash” has always been THE best place to be during credit liquidations (deflation). Since the advent of paper currencies, until today’s fiat experiment, most all paper currencies were “backed” by gold. Looking back to the 1930’s deflation, gold not only did not “go down”, it skyrocketed versus almost all everyday goods, wages, and assets …AND was revalued over 70% higher versus dollars! Both Dent and Martin Armstrong claim the dollar was THE best performing asset in the 1930’s, this is simply not true. Yes it was a good thing to have “dollars” (liquidity), but it was far better (70% better) to have gold.
As I have said in the past many times, today’s dollar is not your grandfather’s dollar. In fact, it is actually the opposite! To explain, back in the day, gold and dollars were interchangeable at a rate of $20.6. In other words, you could walk into a bank with $20.67 and walk out with a one ounce Liberty or vice versa. In short, dollars were “backed by gold” because they were interchangeable. Today, the dollar is not backed by anything. Yes it can be said it is backed by the full faith and credit of the U.S. …or even “mandated” by the U.S. military.
The fatal flaw in the thought the U.S. dollar will be the “safe haven” is believing the “value” to gold was a backing BY the dollar when in fact it w
is “real and safe money”. Nothing could be further from the truth. Gold has been the backing to paper monies going back hundred’s of years. Each time it was discovered there was not enough gold to back the quantity of paper outstanding …the paper failed! This phenomenon has taken longer in today’s world via the use of financial engineering and “credit” to hide the reality, but the reality still lurks and will burst forth on a global basis rather than just regional as in the past. Without going into a full article, the world today is engulfed in the greatest credit bubble in history …fueled by the greatest money printing in history …U.S. DOLLARS!
The question of “where is the safe haven?” has never been more relevant nor important in human history. If you get this one wrong …180 degrees wrong, your financial life will be ruined! Choosing between the dollar and gold as your financial protector is like choosing between a 20 lb. stone and a flotation device on the Titanic! It is THE most important financial choice you will ever make. Use real rather than made up history …and common sense as your guide and do not be scared away from what has been THE ultimate financial life preserver for over 5,000 years, gold!
Standing watch and refuting broken logic,