Thursday, July 2, 2009

China Sells Dollars-2

"The world's most important bond salesman told a Peking University audience Monday that 'in the [US], we are putting in place the foundations for restoring fiscal sustainability.' News reports said the audience tittered at that one, and no wonder. The Chinese are well aware of the great American fiscal and monetary blowout, with the 2009 federal budget deficit set to reach 13% of GDP, if we catch a break or two. ... The Chinese must have been especially startled to hear Mr. Geithner add that the US plans to 'put in place comprehensive health-care costs, costs that are the principal driver of our long-run fiscal deficit.' So by adding another few trillion dollars in new health entitlements, the US will 'bring down' the cost of health care. The Chinese will have to consult their Washington embassy on that fiscal puzzler. ... There's at least once hitch: The US-China trade imbalance didn't cause the current financial crisis. To the extent that 'global imbalances' played a role, the original sinner was the Fed, which flooded the world with dollars. ... The policy point is that the 'imbalances' resulted more from reckless monetary policy than from spend-thrift American consumers or Chinese exchange-rate policy. ... And speaking of inflation risks--that is, danger of a debased dollar and dollar assets--Mr. Geithner didn't help by advising China Monday to allow 'greater exchange-rate flexibility.' ... It's also a signal to the Chinese that the US may secretly want the dollar to decline, which is one reason that, despite the global recession, the prices of oil and other goods that are denominated in dollars have been rising again", my emphasis, Editorial at the WSJ, 3 June 2009, link: http://online.wsj.com/article/SB124398801277079489.html.

"Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizeable portion of this buying has been to build stockpiles in China, and may not be sustainable. At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel exports remain weak. Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including alumimum, copper, nickel, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil", Keith Bradsher, at the NYT, 11 June 2009: http://www.nytimes.com/2009/06/11/business/economy/11commodity.html.

"However, this boils down to nothing more than grandstanding. The Chinese are not idiots. ... Indeed, abandoning the dollar for another currency (say the yen or euro) would serve no benefit from an economic standpoint. ... It would be akin to trading one problematic investment for another: no major world currency is backed by gold or any asset of real value. ... Throughout 2009, China has been buying up natural resouces, commodities, and other real assets at a break-taking pace. ... The headlines were right under the world's collective nose, but no one was thinking 'diversification away from the dollar.' Instead they were thinking, 'purchases needed to fuel economic growth.' ... The reasoning here is simple. Unlike paper currencies, natural resources and commodities cannot be reproduced ad infinitum by central banks. ... Make no mistake, the Chinese have already begun diversifying away from the dollar. They just haven't advertised the fact openly", original italics, Graham Summers (GS), at Gold Eagle, 17 June 2009: http://www.gold-eagle.com/editorials_08/summers061709pv.html.

Secretly? Correction, real assets are not "denominated" in dollars, but units like: barrels, bushels, pounds, etc. What is gold's denomination? Is a krugerrand worth more or less than an American Eagle or Chinese Panda? An ounce of gold is an ounce of gold.

This piece was titled, "China's Commodity Buying Spree". A better title, "China's dollar selling spree". Think about it. In substance, China is adopting Irving Fisher's Compensated Dollar Plan.

Well said, GS.

2 comments:

Anonymous said...

This explains it all...

"The world's most important bond salesman"

No wonder the dollar is crashing... sales isn't carrying the trader's water... move that crappy paper... we got a lot more where that came from...

Commodities or flimsy paper? Easy.

Expected Returns said...

The move out of the dollar is definitely in place. China is very patient and is making smart moves for their long-term viability.

Nice article on the Harvard Indicator btw.