Thursday, February 12, 2009

Green Paper

This article on China continuing to buy IOUs from the U.S. that's linked up on Drudge is interesting:
“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
Well if it makes you feel any better, we hate you for putting us further into the hole.

China is discovering that they've built a house made of (NOT built on) sand. China desperately needs export related jobs to keep the civil peace since they have NO domestic consumption (most everyone in China is dirt poor). So they ship their plastic and electronic junk over here and we in turn send them freighters full of green paper. What to do with that green paper? Well they don't buy anything worthwhile from the nation that issues the green paper so that's out. They could buy stuff from the other suckers on the planet that accept green paper for their goods, but again, there's no domestic consumption so you only need so much of that stuff. So what China is left with is loaning the green paper back to the U.S. so that they can buy even more Chinese stuff.

When stated like that, how long is a system like that really gonna work? What's worse is that the U.S. can (and has) been printing mountains of new green paper and debt, devaluing the store of wealth that the dollar has historically had.

Don't get me wrong, this is BAD for the U.S. as well; however China will eventually face the prospect of not accepting green paper for their goods which will completely sink their economy since their main export customer would then have a worthless currency. They could delay this somewhat by using their excess green paper to buy other stuff (gold, silver, etc.); but purchaing that amount of commodities will artificially drive up their prices and present logistical issues (transportation, storage, etc.). Buying commodities will only work for so long though since, with the main purchaser of U.S. debt missing, the incompetent American regime(s) will probably turn to more drastic measures that will make China's treasury holdings worthless and, again, making the U.S. currency worthless.

China's other option (that they've elected to go with for now) is that they can continue the current game of keeping their currency worth substantially less than the U.S. 'Amero' which will make them poorer and poorer with each mountain of debt that they purchase from the U.S.

The bottom of the bucket is nearing, and unfortunately for China they're going to land there under the U.S. if they keep buying our bad debt.

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