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A Chinese Puzzle
Not to worry, I will still be bringing you the most cutting edge and impactful articles on the macroeconomic forces and events as they occur…
But, at the same time, there will be a more interactive angle to the articles.
Simple; you all know exactly what I think by what I write. But, I also want to know what you think. Just a little more give and take between you and me in this wonderful and fast-evolving digital age in which we live…
Take, for example, the latest developments between China and the US financial system. Specifically, the recent plans to allow China:
1. To buy T-bills directly from the US Treasury, sidestepping the very public Treasury auctions, and
2. Allowing Chinese state owned banks to do business in the American banking industry.
Now, very little has been said about these two news items—apparently they’re not big news at all. But I happen to think otherwise…
Backing away from the dollar
In case you missed it, I talked about these in my interview with Craig R. Smith (Part 2 will run this Friday in The Gorrie Details); Mr. Smith viewed the privilege of allowing the Chinese to buy their T-bills directly from the Treasury as the US being accommodative.
And this does make a lot of sense. After all, they Chinese are our biggest buyer of T-bills…other than the Federal Reserve.
And that last part is what bothers me. You see, I don’t think it’s a matter of “making it easier for the Chinese to buy T-bills” by going directly to the Treasury.
Because it seems to me that they’ve had no problems so far buying T-bills the old fashioned way; why change now?
Indeed, why the change? What advantage could there possibly be for the Chinese to “buy direct” rather than at the public auction?
To me, the key word there is “public.”
Why would the Chinese prefer that their T-bill purchases no longer be public? This is the key; especially when you consider that a) the dollar is losing value and b) that China is trying to lessen their T-bill holdings, and c) China is revaluing their yuan, possibly with plans to back it with gold, in order to d) make the yuan the world’s newest reserve currency.
Assuming that only a, b, and at least the first part of c are true—which they are--the main advantage I see for China to hiding their T-bills from public scrutiny is not how many they’re buying, but rather, how many they’re not buying.
To put it bluntly, China wants to pull out of the dollar as quickly—but also as quietly—as possible. The “direct buy” plan helps them do that, and prevents both the T-bill demand and values from falling as fast as they would if the market saw China’s pullback for what it really is.
Is there a better take on China’s “buy direct” plan than mine? I don’t know, but feel free to let me know!
Now, to the 2nd point. Why would the US allow China’s state-owned banks into the US banking system?
My sense is that the US knows the state of its financial sector better than anyone, and realizes that it will need to have a stake in a new, very strong yuan currency.
It is also a fact that the Chinese economy cannot function without the US consumer market. This is even truer now, since demand from the Eurozone is dropping like a stone.
Also because there are only so many ghost cities the Chinese government can build before domestic demand craters even more. (This will probably happen any way, as I argue in my forthcoming book on China, to be published in March of 2013).
Bottom line? China has the world’s 2nd largest economy, with the world largest cash reserves, and is dangerously dependent upon demand from a bankrupt US economy. Therefore, my best answer to the question is that Chinese participation in US banking will not only strengthens “the US financial system” (not that one will exist with a strong yuan ruling it), but it will also keep China’s economy running.
Not certain about the mechanism that have to be in place that would allow such a currency integration to occur, but it seems to me that that is what is happening.
Because with a devalued dollar, China knows that future US demand for its goods, especially as the yuan rises in value, will shrink rapidly. In fact, it already is.
So there you have it. Those are my views on the latest—that we know of--China plays in the US financial system.
The utter madness of James R. Gorrie
What do you think? Am delusional, ill informed, and paranoid?
All of the above?
If so, tell me why. But when doing so, feel free to give an alternate explanation; I’d really like to hear it.
The gauntlet has been thrown down, TGD readers, who among you will pick it up?
Oh, and by the way, be sure to enter The Gorrie Details Weekly Wrap comment of the week contest.
Watch the video here, http://www.youtube.com/watch?v=y01eViBF3ts and then write your comment on Facebook.com/absolutewealth or via Twitter-thegorriedetails.
Why would you do that? Why, to win a very posh gift each week, like a stainless steel, engraved money clip that can be all yours if your comment wins, of course!
Is this a base maneuver to curry response from you, TGD readers? Of course it is. So watch the short video, cogitate for a moment or two, and then go forth and comment.
And those are…The Gorrie Details.