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Is China Ready To Pull The Plug?
There are two mainstream market assumptions that, in my mind, prevail over all others. The continuing function of the Dow, the sustained flow of capital into and out of the banking sector, and the full force spending of the federal government are ALL entirely dependent on the lifespan of these dual illusions; one, that the U.S. Dollar is a legitimate safe haven investment and will remain so indefinitely, and two, that China, like many other developing nations, will continue to prop up the strength of the dollar indefinitely because it is "in their best interest". In the dimly lit bowels of Wall Street such ideas are so entrenched and pervasive, to question their validity is almost sacrilegious. Only after the recent S&P downgrade of America's AAA credit rating did the impossible become thinkable to some MSM analysts, though a considerable portion of the day-trading herd continue to roll onward, while the time bomb strapped to the ass end of their financial house is ticking away.
The debate over the health and longevity of the dollar comes down to one very simple and undeniable root pillar of economics; supply and demand. The supply of dollars throughout the financial systems of numerous countries is undoubtedly overwhelming. In fact, the private Federal Reserve has been quite careful in maintaining a veil of secrecy over the full extent of dollar saturation in foreign markets in order to hide the sheer volume of greenback devaluation and inflation they have created. If for some reason the reserves of dollars held overseas by investors and creditors were to come flooding back into the U.S., we would see a hyperinflationary spiral more destructive than any in recorded history. As the supply of dollars around the globe increases exponentially, so too must foreign demand, otherwise, the debt machine short-circuits, and newly impoverished Americans will be using Ben Franklins for sod in their adobe huts. As I will show, demand for dollars is not increasing to match supply, but is indeed stalled, ready to crumble.
China, being the second largest holder of U.S. debt next to the Fed, and the number one holder of dollars within their forex reserves, has always been the key to gauging the progression of the global economic collapse now in progress. If you want to know what's going to happen tomorrow, watch what China does today.
Back in 2005, China began a low profile program to issue government debt denominated in the Yuan, called Yuan bonds, or "Panda Bonds". This move was almost entirely ignored by establishment economists. They should have realized then that China was moving to strengthen the Yuan, expand its use in other markets, and recondition their economic structure away from export dependency and towards consumerism (as they have done with the establishment of the ASEAN trading bloc). Of course, in the MSM at that time, there was no derivatives bubble, no credit crisis, no debt implosion. America was on cloud nine. China, through inside knowledge, or perhaps a crystal ball, knew exactly what was about to happen, and insulated itself accordingly by generating distance between its system and the soon to derail retail based society of the U.S. This dynamic has not changed since the 2008 bubble burst, and Chinese activity is still the ultimate litmus test for economic volatility.
Today, there is widespread confusion in markets over the direction of America's financial future. In the wake of the credit downgrade, most investors unaware of the bigger picture are desperately clinging to any and every piece of news no matter how trivial, every rumor from the Fed, and every announcement from the government no matter how empty. China's economic news feeds have been tightly regulated and filtered, even more so than usual (which is cause for concern, in my opinion), while distractions in Europe abound. Let's take a step by step journey through these issues, and see if we can't produce some clarity...
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