Friday, February 13, 2009

FT.com: China to U.S.: "We Hate You Guys"

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Ok that was a somewhat specious headline but from the department of absurd comes this story from the Financial Times. While some have called out that China will eventually abandon buying U.S. debt (which would cause a potential collapse in the dollar, and our country - although the Federal Reserve would step in as a buyer - remember, the whole Banana Republic thing) the problem is timing. Many think it is imminent or "in a year or two". Nah. I agree that if the Chinese had any other choice they should (and would) be moving away. But guess what - it's a co-dependent relationship. We need their money but they need us to buy stuff. Lots of it.

My end game is someday (perhaps in about 8-12 years) the Chinese economy will have evolved enough away from reliance on U.S. exports and more focused on internal consumption plus the export level to other countries. They should have a mature bond market by that time as well to stuff their money bags into. At that point they walk away and expose us as crack (credit) addicts. But not yet - because to break us would break them. As they say, when a borrower owes a little money, the power is with the creditor but when a borrower owes a ton of money, the power is with the borrower <--- waddya gonna do? walk away from us now?? Here is the blurb...
  • China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday. Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.
  • 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.”
  • “Deregulation in the US has gone a little bit too far. The market can’t be omnipotent.”
To which the U.S. answered: haha, sucker!

But on a serious note - the creditor does have power. Lots of it. For example there are MANY rumors out there (and when there is this much smoke, I believe there was a fire) that the Chinese demanded Paulson guarantee Freddie/Fannie debt... and *poof* just like that, he did. That's the power of being your biggest debt holder (aside from US Treasuries, the Chinese own a ton of Fannie/Freddie debt)

Or just earlier this week... Bloomberg: Chinese Needs U.S. Guarantees for Treasuries
  • China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank. The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” “That would be one of the prerequisites for more purchases.
  • He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.
I won't get into where this is all headed, but you get the drift. As time passes, the balance of power will shift from crack addict to the crack dealer. And the crack dealer will be able to "pressure" for his way in many different ways - military, international, currencies, the whole shebang.

It will be an interesting few decades ahead.

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