Posted on 05/21/2004 12:07:40 PM PDT by FreeMarket1
The Great Ravelling Begins: China, Japan Stitch Up By David Morgan, editor of Silver and Industry Trend Investor
This article first appeared on FreeMarketNews.com
A recent article by Marshall Auerback “China and the U.S.: The Great Unravelling Begins?” was instructive not only for its sober tone but also for what Auerback only referred to in passing but that more paranoid types might find extremely noteworthy.
Auerback’s analysis, written for the “Prudent Bear” is fine so far as it
goes. It is always a pleasure to read an adult analysis of the global financial situation, one that recognizes the nature of fiat money and is clear-eyed about the interactions of central banks.
The thesis of the article is that the United States has been using China as a kind of “bank of last resort.” I’ll let Auerback explain it himself:
“The economic intertwining of the US and China has grown apace over the last 15 years and has begun to resemble less a romance, more the beginnings of a death embrace. Today, China uses its peg to recycle massive dollars back into Treasuries to the US, which enables it to continually expand its capital
expenditure to overproduce goods that America doesn't need and can only buy on credit provided by its Chinese benefactors. It has become an increasingly important, albeit fundamentally unhealthy dynamic, underpinning the global economy.”
All right. Give up? Here’s a translation: The U.S. funds its overspending on social and military programs by selling Treasurys to China. Chinese funds are then circulated through the American financial system, allowing U.S. consumers to purchase more goods from China. The same dynamic has been at work in Japan for nearly 20 years now and has allowed the United States to maintain what Auerback calls “King Dollar” despite its profligate government spending.
It’s Auerback’s contention that this neat system is about to unravel because the inflation that the United States has exported to China is now hitting that country hard. The economy is growing far too fast and Chinese authorities realize they have a problem on their hands.
Reading further into Auerback’s thesis, we come to understand that his prediction is probably for a rough Chinese landing that will reveal numerous credit distortions, much as the Asian Flu revealed in the late 1990s.
How will this take place? China will raise rates internally – and this will slow economic growth. At the same time, China will cut back on the amount of Treasurys it purchases from the United States. The United States will either have to spend less or raise the rates on its Treasurys to make them more
attractive.
Under Bush, Jr. the chances of the United States spending fewer dollars seem slim. But hiking rates is no panacea either. Chances are, though, that rates will go up before spending goes down. This means interest rates in both China and the United States are moving higher with predictable impacts on growth, consumer confidence, etc.
Auerbacks’ contention is that the United States, being the debtor nation, will be hit harder by this credit transformation than China. He predicts a fate for the United States not unlike that of third world countries hit by a storm of debt and sudden “fiscal discipline.” Bankruptcies will rise and the middle class will fall.
All this is good so far as it goes, but Auerback refers to something in passing that is of great interest – far greater interest than his analysis of the China/US financial relationship. His revelation comes midway through his
article and one waits breathlessly for him to return to it but he never does.
Here is what Auerback writes:
“There are already signs that the reign of King Dollar is drawing to a close. East Asia is including moves toward closer co-operation on bond markets, currencies, and the management of foreign exchange reserves, according to leading Asian bankers and monetary officials who met this past weekend in Seoul. The meeting was a follow-up to a process commenced back in 2002, the so-called Chiang Mai Initiative, which called for a pooling of foreign reserves, and the continuing development of local-currency bond markets. New steps introduced this past weekend included calls for more regional free trade agreements, followed by interim measures to stabilise Asian currencies against each other and, finally, monetary union.”
Why haven’t we heard more about the Chiang Mai Initiative? A quick Google search reveals only a spattering of dry mentions and reports, maybe a half-dozen in all.
It’s enough to make one paranoid. Hell, it’s enough to make one believe in monetary conspiracies.
You see, for years those on the “loony” right have been preaching that the plan of internationalists is to create three separate currencies in three separate regions of the world and then merge them into one currency – thus creating a one-world financial system and ultimately a one-world political system.
Back when the European Union was nothing more than a trade agreement, these “loonies’ were properly scoffed at. But today the European Union is a powerful political force with some 25 members. Meanwhile, in the western hemisphere. The United States is busy with so-called CAFTA talks, heir to the much-despised NAFTA, and intended to tie the United States and South American and Canadian countries into a much tighter economic cooperative.
Now comes the third shoe dropping, Chiang Mai. Funny, it’s not much talked about. In fact, when Chiang Mai first was broached it was scoffed at by no less of an authority than the Online Asia Time which wrote the following nearly four years ago in “Silly Scheming in Chiang Mai:”
“Asian nations' finance ministers meeting this past weekend at (or behind) the scene of the annual Asian Development Bank confab in Chiang Mai (Thailand) got it all wrong. Several of them (or their predecessors) had openly or more guardedly blamed the Asian financial crisis that hit the region in 1997 on international currency speculators. Well, the two biggest and baddest of those, Julian Robertson and his Tiger Fund and George Soros and his Quantum Fund, have fled the scene of their alleged crimes and all but ceased to exist. The ministers should have taken note, declared victory, and left it at that.
”But no, never let good be good enough. Instead, these valiant fighters of previous wars revived and expanded currency swap agreements first dreamt up in late 1996/early 1997 enabling member nations to draw on each others' foreign exchange reserves when faced with liquidity troubles and hostile currency attacks. It all now goes under the name of Chiang Mai Initiative and combines the resources of the Asean countries, China, Japan, and South Korea. But, mind you, the arrangements in place in 1997 when the Asian crisis hit, albeit less
comprehensive, did nothing to prevent or attenuate it.”
The Asian Times goes on to conclude that certain attendees do not seem “too concerned that the Chiang Mai Initiative will amount to much, and hence not much bad, and probably for the same reason we aren't: the detail is not likely to be worked out any time soon and thus the devil won't have much chance to make an early appearance.”
Wrong, wrong, wrong. The Chiang Mai Initiative is alive and kicking. As of October 2003 some $32 BILLION in bilateral swaps had been negotiated between some 13 Asian partners and predictions were that such arrangements would soon lead to much tighter financial cooperation. And where have we heard that before?
The European Union, the CAFTA arrangement in the Americas and now Chiang Mai. That’s the story, my friends. Busily the internationalists work their magic, restraining economic nationalism with economic bonds. It’s all there in black and white. The most paranoid among us were absolutely correct. Three currencies are on their way. And out of three one. Sort of like the Lord of the Rings. And I ask you, Who will hold the final ring of power when only one ring (currency) is proclaimed viable.
What does all this have to do with China? China is a lynchpin in the international system. Without China’s active participation, there can be no global currency. Thus the ancient, fearful rulers of China need to be won over. And the economy of China needs to be privatized. (You can’t have a true, working
global currency without private marketplaces.)
The dance has just begun. China must be tamed through a variety of methods. It will be tempted by riches and assailed by threats. It will be pressured to be more “open” and transparent (as if Western Democracies are.) But ultimately, it is my prediction that China will avail itself of Western temptations and become a pliant but powerful player in the Eastern and world economies.
Over the next few years, you may read many horrible things about China. Its public policies and attitudes toward its own people are questionable at best and horrid at worst. But I have been writing and preaching now for a fairly lengthy period of time that China must become a major, even dominant, financial power because certain powerful interests in the West want it that way.
In the short term, Auerback may be right that China and the United States have some unraveling to do. But in the long term, it’s a different story. The global economy is enveloping China and is not about to let go. China is being designated as a player -- and as I’ve said before, I’m playing, cautiously, in China. Auerback gets his story, but he misses the big one – Chiang Mai, and what it means to the world. The raveling has just begun.
"Stary-eyed-one-worlders" are looking very hard-eyed.
To cut to the chase, the game here is the Yuan will likely be tied to the Euro and the Ruble. The Yen gets screwed, Japan is actually likely to shock the world - by joining the trodden upon dollar camp. The CAFTA attempt will fail, leaving the Dollar camp to be a remnent of the US, Japan and the UK and appendages. This is war by other means, by the Eurasian Axis, against the Amero-British-Japanese remnent.
I don't know if I'd call that camp a remnant
Don't ravel and unravel mean the same thing?
85% of US debt is held by Americans.
China has about 3-4% and Japan about 7%
In the here and now they hate and detest each-other.
That won't stop them from doing business, but unite? Never.
China has about 3-4% and Japan about 7%
Impossible. China has 150% and Japan has the other 100%.
Sorry, I was a gloom and doomer for a minute there.
Finally! Someone gets it.
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