Last week there was considerable media attention to China's stockpiling of commodities, as traders look to determine reasons for recent price increases, and also discern the impact on future price trends. Many commentators assert that the Chinese commodities buildup is unsustainable, which is probably true. But looking underneath the surface, we should ask whether China is merely taking advantage of a perceived advantageous price environment, or whether something else is at play. Future prices for commodities will be affected by the broader Chinese goals, including those that relate to currencies.
There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully. The gathering is, in the words of economist Michael Hudson, “the most important meeting of the 21st century so far.”
It is the first formal step by our major trading partners to replace the dollar as the world’s reserve currency.
...What the new system will be remains unclear, but the flight from the dollar has clearly begun. The goal, in the words of the Russian president, is to build a “multipolar world order” which will break the economic and, by extension, military domination by the United States. China is frantically spending its dollar reserves to buy factories and property around the globe so it can unload its U.S. currency. This is why Aluminum Corp. of China made so many major concessions in the failed attempt to salvage its $19.5 billion alliance with the Rio Tinto mining concern in Australia. It desperately needs to shed its dollars.
China is trying to get rid of all the dollars they can in a trash-for-resource deal,” Hudson said. “They will give the dollars to countries willing to sell off their resources since America refuses to sell any of its high-tech industries, even Unocal, to the yellow peril. It realizes these dollars are going to be worthless pretty quickly.”
The architects of this new global exchange realize that if they break the dollar they also break America’s military domination. Our military spending cannot be sustained without this cycle of heavy borrowing. The official U.S. defense budget for fiscal year 2008 is $623 billion, before we add on things like nuclear research. The next closest national military budget is China’s, at $65 billion, according to the Central Intelligence Agency.
What makes this article particularly interesting, and ominous, is the plausibility of its primary assertions. Foreign powers certainly see holding large dollar reserves as increasingly risky. Moreover, lending to the US also finances a global military empire that is not in the interests of China, Russia, or Iran, each of whom will be attending the meeting. Each of these governments would like to see a world order that reduces US dominance, particularly in central Asia. It will be telling to see what results from this meeting, and to what degree these countries can form agreements that serve a common purpose.
Earlier this month, Bloomberg reported,
For all the hand-wringing over the dollar’s slide, the expanding U.S. deficit and the nation’s AAA credit rating, the bond market shows international demand for American financial assets is as high as ever.
The purchases by foreigners show that, at least for now, there’s little chance of buyers abandoning the U.S. or threatening the dollar’s status as the world’s reserve currency.
“The U.S. Treasury market is the widest, deepest, most actively traded market in the world,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “There’s really no other game in town.”
Moreover, as I reported last Friday, we are still in an environment where private dollar debt is being destroyed at a tremendous rate, which is deflationary for other assets as compared to the dollar, even considering the massive public debt being created by the US government. The Federal Reserve is still fighting deflation, despite the fact that many traders are looking for inflation to kick in any minute now.
Looking at these dynamics, we can see why economists like Paul Krugman see stimulus as so important. Households need money to pay off mortgages and credit card debt. As long as Americans are defaulting on debt at the grassroots level, banks will continue to see enormous losses in their heavily-leveraged portfolios, and the US government will feel compelled to bail them out. As I've commented before, Wall Street has perpetrated the greatest scam ever on the American public, with our government's assistance, including President Obama. To continue this slight digression, read today's post by Karl Denninger.
The question becomes: how long can this house of cards remain standing? If the government's gambit does not play out according to plan (quantitative easing combined with massive corporate bailouts), what then? And relative to this diary's topic, how will other world powers react when considering their own interests?
http://www.groovinator.blogspot.com