Financial topics

[Higgenbotham]

Just wait until they dump our all bonds.

Looks like that may come when we have no more technology they need to buy, or we refuse to sell them the technology they want.

[Reality Check]

The Chinese are taking junk Federal Reserve dollars as part of a long term plan to acquire resources, not as a plan to accumulate "more" junk Federal Reserve dollars.

To the contrary, the Chinese did have a plan to accumulate "more" junk Federal Reserve dollars, and they executed that plan prior to 2009.

Prior to, and including, 2008, and again beginning in 2010 through 2012. The Chinese were, and still are, getting ever increasing numbers of U.S. dollars through ever increasing trade surpluses with the U.S. As shown here:http://www.census.gov/foreign-trade/balance/c5700.html

Until 2009, China was actively investing those dollars in more and more "junk Federal Reserve dollars" in the form of U.S. Bonds ( denominated in U.S. dollars ) as shown by this: http://www.davemanuel.com/charts2/china ... _debt.html

Since 2009 the amount of China's foreign currency reserves ( which include foreign currency and foreign currency based bonds such as U.S. dollars and U.S. government bonds denominated in U.S. dollars as well as other currencies and other government's bonds ) has continued to grow rapidly as shown by this: http://www.chinability.com/Reserves.htm

But the percentage of those foreign currency reserves that are U.S. dollars based has been dropping drastically since 2009. As shown here: http://online.wsj.com/article/SB1000142 ... 3Dcomments
And as shown indirectly here: http://www.treasury.gov/resource-center ... ts/mfh.txt
and indirectly here: http://www.treasury.gov/resource-center ... hhis01.txt

The point to this is:

1. China is no longer investing ( in U.S. dollar based investment instruments - like U.S. Treasury bonds ) the $300 Billion per year in cash China is getting from the U.S., via a bi-lateral trade surplus with the U.S., and thus China is no longer helping to finance the U.S. government's debt, as it did for decades before 2009.

2. China has frozen it's investments in U.S. dollar based investments such as U.S. currency and U.S. bonds for the last two years plus ( Jun 2010 through current ). At the same time China's investment in other foreign currency based investments has expanded rapidly. China's risk related to the U.S. dollar is decreasing as a percentage of their total economy, and also as a percentage of their foreign currency reserves, because China's total economy is growing rapidly, and also their foreign currency reserves are growing rapidly, while their U.S. dollar based investments are frozen. This is the exact opposite of what occurred prior to 2009 when China was rapidly expanding Chinese dependency on the U.S. dollar as their economy grew, and as their trade surpluses with the U.S. grew.

3. This massive decrease in U.S. debt purchases by China ( since 2009 ) has been made up by massive printing of U.S. dollars by the U.S. Central Bank which the FED then used to purchase U.S. Treasury bonds, thus soaking up the new U.S. debt that China is no longer buying. The U.S. central bank now holds more U.S. Treasury debt than any foreign country which is amazing since they held less than 300 Billion in U.S. debt prior to 2009.

[Reality Check]

The above elimination of China's purchases of additional U.S. debt can be compared to the difference between eliminating the U.S. government Deficit and paying down the U.S. Government debt.

The U.S. government has been running an annual deficit of between 1.2 Trillion and !.6 Trillion over the last 3 to 4 years.

That deficit spending represents up to 10% of the entire U.S. economy.

Even if not even one penny of the U.S. debt was paid off, cutting the U.S. government spending next year to eliminate the annual deficit would result in shrinking the U.S. economy by up to 10%.

If the U.S. Debt of 16,000 Billion was paid down by cutting the annual U.S. government spending by an additional 100 Billion dollars. The big impact to the economy would come from the loss of 1,200 hundred billion needed to eliminate the annual deficit, not the 100 Billion in additional government spending cuts needed to slowly pay down the debt.

Ironically, the big impact to the debt would also come from the 1,200 cut not the 100. The 1,200 cut would avoid the problem ( the debt ) growing by an addition 1,200 while the 100 would merely reduce the big problem ( the debt ) by 100.

Similarly the big impact of the change in China's policy is that the annual trade surplus is not being invested in U.S. dollar denominated investments, and thus, from China's perspective, China avoided it's U.S. dollar related risk from getting 300 Billion dollars a year bigger.

[Reality Check]

http://vimeo.com/8125514
This Video of a Dynamic Pie Chart

Shows how the Foreign Country owned U.S. Debt exploded from 2000 to 2009

And how China, in 2008, became the largest foreign holder of U.S Debt passing up Japan for that honor.

Must watch in Full Screen mode - area of pie chart represents size of foreign owned U.S. debt.
http://vimeo.com/8125514

[Reality Check]

China became the largest Foreign Country holder of U.S. debt in September 2008 passing Japan for that Title.

Japan, the long time leader, was closing on China in July 2012 to re-take that title.
As shown here: http://www.treasury.gov/resource-center ... ts/mfh.txt

[OLD1953]

Yes, the war and the tax cuts were financed by foreign debt holdings, that's well known.

In the bigger picture, cutting the deficit to zero would not cut the deficit to zero. This seeming oxymoron is explained by the fact that tax collections would drop, thus necessitating further cuts. This is the Greek problem exactly, they cannot cut to the level where they balance their budget, because every cut reduces income, they are told "you didn't meet your goals" and they cut again. Greece not having much of a tax collections agency, cheating rises as resentment at the cuts are felt, making it even worse.

That's why the moderate approach is needed, though there is NO politician in the US save perhaps Ron Paul that would call what I think could work now as moderate. The way the pols would put it is that I'd cut four trillion, increase taxes by four trillion and borrow four trillion. That's the politician way, they add everything up over ten years. Generally, they want to cut maybe a tenth of what I want, increase taxes by about half, and pray for a miracle to reduce the nine trillion they propose to borrow.

What I think could work now will not work in five years. The economy will become even more dependant on deficit spending every year until you cannot stop. Then we will have a crash indeed. I believe the outgoing Congress knows this, and will either allow us to fall "off the cliff" or will do a deal. What they do will have a great effect on my future plans, becasue I do not believe this can happen four years from now and be successful, it's now or not at all.

[Higgenbotham]

The Chinese are taking junk Federal Reserve dollars as part of a long term plan to acquire resources, not as a plan to accumulate "more" junk Federal Reserve dollars.

To the contrary, the Chinese did have a plan to accumulate "more" junk Federal Reserve dollars, and they executed that plan prior to 2009.

The Chinese never had a plan to accumulate "more" junk Federal Reserve dollars. They were and have always had a plan to accept dollars as payment while at the same time actively trying to spend dollars, even prior to 2009. They made enough attempts to buy assets prior to 2009 that their dollar holdings would have declined before 2009 had they found willing sellers. Two examples are the Chinese offer for Unocal for about $20 billion in 2005 and the offer to buy some of all of the US gold holdings multiple different times. But in both of those instances the US refused to sell. Had the US been willing to sell, the Chinese would have glady reduced their accumulation of dollars.

More recently, as your numbers show, the urgency of the Chinese to get out of dollars has increased and I don't disagree that is significant and important.

[Reality Check]

The Chinese never had a plan to accumulate "more" junk Federal Reserve dollars. They were and have always had a plan to accept dollars as payment while at the same time actively trying to spend dollars, even prior to 2009. They made enough attempts to buy assets prior to 2009 that their dollar holdings would have declined before 2009 had they found willing sellers.

The problem with that analysis is it assumes that the only Choice the Chinese had, for the decades before 2009, was buy U.S. Bonds or buy other assets that the United States government had a veto over China buying. Or, alternatively, the only assets worth purchasing were U.S. Bonds or assets the United States government had a veto over China buying. Neither set of assumptions were true in the decades before 2009.

The Chinese chose to keep a massively growing amount of their investments in foreign currency reserves such as foreign ( foreign to China ) bonds and foreign currency; and they chose, prior to 2009, to keep those foreign currency reserves in U.S. dollar denominated investments ( such as U.S. treasury bonds ) rather than a different foreign currency. Not because they had to, but because that was China's choice, the Chinese investment plan. China is continuing to massively expand their foreign currency reserve investments after 2009, just not in U.S. dollar based investment instruments.

China always had the choice to invest in hard assets like gold, or copper, or platinum, or titanium or even iron ore or foreign companies not subject to a United States veto. U.S. dollars were the worlds cash. China had U.S. dollars. Cash talked when it came to buying things in the decades before 2009. China also always had the choice to expand their foreign reserve investments using investment instruments based in currencies other than dollars. Again, in the decades before 2009, other countries were more than willing to accept U.S. dollars in exchange for their currency.

As the Chinese have been doing for the past two to three years, China could have converted the U.S. dollars, China received as a trade surplus every month, into other foreign currency investments or hard assets like Gold and Copper: http://www.chinability.com/Reserves.htm

China still has the same problem today, a massively growing bi-lateral trade surplus with the U.S. that floods China with cash in the form of U.S. dollars. They are just making different choices as to how they invest these monthly gifts of cash from the U.S.: http://www.census.gov/foreign-trade/balance/c5700.html
and by: http://www.davemanuel.com/charts2/china ... _debt.html

[Reality Check]

The only point I was trying to make initially was that:

China is continuing to get the benefits of:

1. An ever increasing Balance of Trade Surplus with the United States ( $300 Billion a year in U.S. cash ) from the United States, and,

2. Ever more factories, mines, engineering facilities, intellectual property and other production capacity being voluntarily moved from the U.S. to China.

3. China continues to receive preferred nation trading statues.

Even after China stopped investing in additional U.S. dollar based investments such as U.S. Treasury Bonds, and,

Even after China stopped increasing it's investment in the stability of the U.S. dollar as China's economy continues to grow rapidly, and,

Even after China decreased China's dependency on the U.S. dollar remaining a stable and preferred world reserve currency, and,

Even after China started actively opposing the U.S. at the United Nations.

Even after China began making military and economic threats ( and acting on those threats in limited ways) against U.S. treaty allies.

The point has been made on this thread that China has elected to continuing to pay the price of growing U.S. dollar dependency, in order to gain the above continued benefits from the U.S., while preparing for war with the United States..

When in fact, IMHO, China has stopped paying the price of growing U.S. dollar dependency, but is still gaining the benefits, and is still preparing for war with the United States.

[Higgenbotham]

The problem with that analysis is it assumes that the only Choice the Chinese had, for the decades before 2009, was buy U.S. Bonds or buy other assets that the United States government had a veto over China buying. Or, alternatively, the only assets worth purchasing were U.S. Bonds or assets the United States government had a veto over China buying. Neither set of assumptions were true in the decades before 2009.

Prior to 2009, the Chinese would have bought an oil company or a horde of gold anywhere they could find one. Problem was, the US was the most obvious place to find that and the US wasn't willing to sell. Certainly, the Russians weren't going to sell an oil company to the Chinese and neither was anybody else who has state owned oil companies, so going somewhere that has private sector energy companies like the US or Canada was the only real place to look.

The Chinese chose to keep a massively growing amount of their investments in foreign currency reserves such as foreign ( foreign to China ) bonds and foreign currency; and they chose, prior to 2009, to keep those foreign currency reserves in U.S. dollar denominated investments ( such as U.S. treasury bonds ) rather than a different foreign currency. Not because they had to, but because that was China's choice, the Chinese investment plan. China is continuing to massively expand their foreign currency reserve investments after 2009, just not in U.S. dollar based investment instruments.

Had the Chinese been able to substitute gold or oil for those foreign currency reserves they would have, but there wasn't enough for sale. I would agree that prior to 2009, the Chinese looked at US dollars as being the preferred foreign currency alternative to purchasing gold or oil, and since then they no longer prefer US dollars over other foreign currencies.