China Won’t Fund U.S. Forever (But the Fed Will!)

04 Nov

China Won’t Fund U.S. Forever (But the Fed Will!)

It’s a good thing we have two eyes.  For good and sufficient reasons most people have been keeping a close watch on domestic affairs.  It’s a good thing to do, especially in the political season.

But we have also been keeping an eye of global affairs where something important is happening.  Most of the media misses it because they do not understand how important it is.  But it affects everything, the value of our money, the cost of living, and our long-term prosperity.  In other words it affects the American Dream.  

It is the most important financial megatrend of our time.

America’s creditor base is decaying.  

Here is the latest.  As US debt has mushroomed, China has been a major creditor.  In the fall of 2013 its holdings of US Treasury debt reached $1.3o5 trillion.  

Now, it is shedding its holding of US government debt.  It’s down to $1.06 trillion.  

Ten years ago, Russia held $180 in Treasury debt.  But as we reported in May, “[Russia’s] dollar holdings have fallen so low they are reported down in the asterisks in US Treasury listings, below the holdings of countries like Iraq and Vietnam.”

Of course you know that in the both the case of China and Russia, de-dollarization goes hand in hand with a determined move to fortify their bank reserves with gold.  

In a commentary on May 20, we wrote that the primary impact of this move to gold is threefold:

  • Central bank gold purchases are a harbinger of growing “de-dollarization,” the waning role for the dollar as the world’s reserve currency.  As such they also signal a long-term decay in the dollar’s purchasing power.
  • The addition of gold to central bank reserves makes those nations less susceptible to US  foreign policy hegemony.  It is no secret that the rest of the world, including long-time US allies, are bristling at what they see as the heavy hand of US trade restrictions and sanctions that directly impact their economies.
  • The sheer quantity of central bank buying power has an unmistakable impact on gold’s trajectory.  Furthermore, gold in central bank reserves is gold in strong hands and is less likely to be sold.

Meanwhile, in a report on China’s waning dollar holdings, CNBC cites an analyst saying, ““The key question then is: who will finance the heavy issuance associated with very large budget deficit.”

We know the answer to that.  US debt will have to be financed by Federal Reserve money printing.

jim-sign