Recent news that China’s central bank still consider US treasuries worthy of investment brought gold prices down. However I suspect that it is a deception rather than any more dumbness on the part of China. Dumping dollars will hit china hard as much as maintaining a portfolio of falling dollar. China is finding a way out to exit and it needs time. If that is not true and China is dumb as they have been all these years in recognising the credit-unworthiness of US and the risk to its investments, then it will come to them as a rude shock.
Deteriorating US financial data is only exposing structural weekness in US economy. Recent UN report to replace dollar with a new reserve currency only highlights the weekness of dollar. Even the supporter of stimulus economics like Paul Kruggman believes that US should care least about the rising deficit and value of dollar even if it touches bottom. I am not supporting Kruggman but only highlighting that even he believes that the path of stimulus leads to a fall in the value of dollar. So if the current path of bubble prosperity continues, dollar will rock bottom and China will continue to suffer high inflation because it is giving its supply to US and in return creating more paper money in its economy to support its artificial pegging of exchange rate. Not to forget that this same supply if made available internally to Chinese, would have controlled inflation.
China will suffer either way because if it continues to lend to a bankrupt country that is producing nothing but thriving on borrowed money, there is no way it can get its money back. What it can at the most get is the dollars which America can print as much as it wants since it has no restrictions to do so after it unilaterally brought the brettenwood system down in 1971. But what America can produce to fill the gap with the papers it has printed? When better sense will prevail, China will dump its trillions of treasuries and dollars to buy / recover goods it has shipped. Not only China but Japan and other central banks which are holding US treasuries will follow suit. This will flood the market with dollar making it so cheap that it won’t buy anything.
How the better sense will prevail on China? In my opinion, when the stimulus money starts to vaporise, we will see the financial data showing slow down. All hopes of recovery will start fading and a need of another stimulus will be felt. I strongly believe that we are currently entering this stage. The demand of more stimulus is already coming from the likes of Paul Kruggman who argues that without it we are entering a great depression. The US government at this stage will have only have two choices. Either to accept the crash or print more dollars to push it ahead. Based on what has been done in the past and what the opinion of mainstream economists says, I strongly believe later of the two option which is printing of dollars or stimulus will be exercised. This will further bring dollar down and raise Chinese concerns. Gold prices will further skyrocket so as China and India’s inflation.
Not only China, even common man will see the futility of Stimulus economics. China will be concerned of falling dollars and will put all pressures to resist it. Common man in countries like India and China which are heavily exporting to US will come on the roads to resist inflation. This is what I said earlier in this article as rude shock which will wake up China. The crescendo against US policies which were enabling it to live lavishly on borrowed money while exporting inflation will only rise and even the most dumb will be forced to think about it.
As the world will enter the great depression and currency crisis, Gold will be considered as the safe haven and only currency left for international transactions which will make it a real precious metal to own.
If on the other hand a liquidity crisis is embraced earlier and no more stimulus is given, it will be much worse than the great depression of 1929 because then US was a trade surplus and a manufacturing hub and now it has the worst trade deficit and debt in the whole world. Liquidity crisis will result in business collapses, higher unemployement, impacting private debt repayments, bankruptcies, bank collapses, civil unrest etc. It will be much much more severe than many can imagine. Horrendous trade deficit combined with ballooning debt will make interest repayment difficult. This will mean extreme austerity, much severe than what the world is asking from Greece, Spain and other deficit countries. It is only foolish to think that US will bear so much of pain to repay the debt of its lendors. Even if there is a president who is most righteous: he will face internal revolt from the people who will not be willing to accept so much of pain for no fault of theirs. In all likelyhood US will default, finding some excuse to blame China. At this point or even earlier dumb Chinese authorities and even common people will see cracks appearing and the house of cards falling, resulting in a panic. What will happen when China dumps its treasuries and accumulated dollars to buy the goods back ? There won’t be enough goods but loads of dollars in the market creating massive inflation or hyperinflation or currency crisis. As Gerald Celente says “when people loose everything and they have nothing left to loose, they loose it.”
Gold is the best bet against an imminent currency crisis. It is not the price of gold or commodity that is going up but the purchasing power of the paper currency going down. Chinese authorities are forcing its citizens to live in poverty while they deserve all the comfort or much more than their US counterparts who are simply borrowing the fruits of chinese hard work with a guaranteed default.