Tuesday, June 9, 2009

Told you so...

China airs fears on U.S. Debt
Senior Chinese leaders have privately voiced fear over the soaring US budget deficit and are increasingly looking to diversify from the dollar, a Republican congressman said.

"We heard across the board -- in private -- substantial, continuing and rising concern," Representative Mark Kirk said after a trip to China that included talks with government officials and central bank chief Zhou Xiaochuan.

This is what happens when you borrow more than you can afford. We have taken out a giant subprime mortgage and it appears that the bank is already contemplating cutting off our equity. Like it or not, China is a larger holder of Treasury debt and is our largest trading partner. We don't want to make them think we are going to inflate our way out of this problem.(Although that is what will happen whether or not the FED does it on purpose.)

Kirk's assessment differed with that of Treasury Secretary Timothy Geithner, who said last week on a separate visit that Chinese leaders had expressed "justifiable confidence" on the future of the recession-hit US economy.

Kirk traveled with Representative Rick Larsen, a member of President Barack Obama's Democratic Party, who also painted a less gloomy picture of Chinese officials' views.

China is the largest creditor to the United States with some 700 billion dollars invested in Treasury bonds. Zhou earlier this year floated the idea of replacing the dollar with a basket of currencies as the benchmark global unit.

Instead of a basket of currencies how about we make the global benchmark Kathie Lee Gifford blouses and copies of Mao's Little Red Book. What we always say, at least me to my friends, is that the Chinese would never call in the debt that we owe them as it would kill their economy which is heavily reliant on exports of cheap plastic shit to sell at Wal-Mart. What we have seen in the past several years since Bush starting running up his deficits is a rise in the Chinese Middle Class, as well as a global middle class which will be competing for ever more scarce resources. Per the Wharton School of business.

China is expected to become the world's third-largest consumer market by 2025 as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute projects China's middle class will increase from 43% of the population today to 76% by 2025. "The shift from investment to increasing consumption overall -- and as a share of GDP -- is very important to sustainable growth in the long-term. China has maxed out on the input model," says Diana Farrell, the Institute's director. India has been more open to consumption, but like China it has a very high savings rate that Farrell says should be converted to consumer spending to strengthen the overall economy.

So, let's look at this. We have a huge consumer base which has been saving money and being dutiful in a way that the American consumer has forgotten. The global currency which will be in vogue, so long as we don't cave on some kind of supra currency, is the dollar. What is the one thing that runaway inflation kills more than anything else... savings my friends. My hypothesis is that the Chinese will continue purchasing T-Bills, but they are going to want a higher RoR. This will push interest rates up for the average consumer.

Of course, this is just a guess, but then again we never thought that the ChiComs would prattle on about wanting to diversify their portfolio. Time to bring back King Dollar. What I believe that Ben Bernanke will begin to do after the repayment of some of the TARP monies to the FED is gradually raise the FED interbank rates, we need to begin to suck up some of the excess capital that is floating around and get it into circulation. Hopefully, this will satisfy the Chinese as well as bring a little order back to incentives to save money. Investment will come later.

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