China Will Not Unload Its US Government Bonds Because of the Debt Ceiling Crisis

31 July 2011

I thought I should write this while the debt ceiling debate is still raging. I want to make these statements before the matter is settled.

To begin, the debate over the ceiling is for real - it's not a charade. The Tea Party folks were elected to reign in US government spending. They aren't faking.

Further, let's say a deal is not reached by August 2. This would not necessarily mean that US government bonds would collapse in value. Continuing revenues could still be channelled to meet interest payments on US debt (which are presently only about 10% of US government expenditures - though solely because interest rates remain low).

Since the US prints its own money, it is well-known that the country cannot run out of cash (it can only run out of cash that has lasting value). This is unlike Greece, which shares the Euro as a currency along with the other members of the European Monetary Union. Greece cannot “print money,” but the US can.

However, there has been talk that the Chinese, who now hold something like $1.2 trillion in US debt instruments, could “foreclose” on the US, basically tanking the US currency and with it the US economy.

This argument misapprehends why the Chinese have accumulated $1.2 trillion US dollars in the first place.

If you want to understand this better, I recommend that you read an excellent article by a professor at Tsinghua University's School of Economics and Management in Beijing. In a very concise piece, Professor Patrick Chovanec makes clear why the current Chinese economic strategy not only requires China to keep its existing US government bonds, but in fact to continue buying more (though they are certainly diversifying).

Professor Chovanec states, "China’s growth model for the past 30 years relies, in large part, on running a trade surplus (selling more than it buys from abroad) in order to maximize capital accumulation and therefore investment at home. At the same it, it encourages inflows of foreign investment into China in order to speed up that process even further, while restricting Chinese money from flowing abroad, in all but a few controlled circumstances.

"The result is that foreign currency flows into China and piles up, with no outlet to flow back out again. Normally, all those excess dollars that were piling up in China would fall in value relative to the RMB, until the imbalances corrected themselves. However, in order to keep those imbalances in place, the Chinese government intervenes to buy up all those excess dollars (and euros, and yen) itself, to keep its currency from appreciating, and accumulates them as official reserves. It has to invest those reserves somewhere until it decides to use them to buy U.S. goods or make more direct investments with them abroad.

"Since the U.S. is China’s largest customer, and since many smaller customers also settle their international trade in U.S. dollars, roughly 70% of China’s $3 trillion reserves are in dollars. In theory, it could sell some of those dollars for other currencies or for commodities, like gold or oil, but in practice, given the huge sums they are already holding, its hard for China to sell off even some of its dollars without undermining the value of what it has left. Even if it could do that, there just aren’t any markets that are as large or liquid as the market for U.S. Treasuries, to accommodate the amounts of money we’re talking about. The fact is, as long as China wants to sell goods for dollars, and decides to accumulate those dollars as reserves rather than spending them on imports or investments, it has little choice not only to hold the Treasuries it already owns, but keep buying more and more."

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I'm not saying the US is not headed down the road to disaster. It is. Things have already gone too far. But the Chinese are not going to upset the applecart next week, whether the debt ceiling is raised, eliminated by presidential decree or maintained.

Click here for Prof. Chovanec’s article.

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Oh, just in case you thought that the Tea Party folks are really here to fix the problem, have a look at which party ran up the biggest tally of new Federal expenditures in US history:

I'm not calling Mr. Obama innocent. He has certainly been a big spender - but he has been no match for the George W. Bush Republicans! As they say, politics makes for strange bedfellows.

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Linguistic and Numeric Literacy in Leadership

23 June 2011

I am not convinced that US President Obama has a handle on either domestic or global economic troubles, nor am I quite sure what he did to earn the Nobel Peace Prize.

However, he is able to pronounce almost all the words he says correctly.

I noticed on the news last night that he used the term "Taliban" correctly, emphasizing the "ee" sound (Ta-lee-BAN).

After hearing GWB say "nukulur" a few too many times, it is refreshing to have a literate and articulate president.

If Mr. Obama doesn't win re-election, I hope we don't see another president who is "absent a brain" elected (Sarah Palin being the most obvious present example).

Ron Paul keeps standing up and nailing the truth about the economy. I have no idea if he is fit for the presidency, but he is certainly economically literate, and in this case, much more so than Mr. Obama.

In Canada, the literate, engaging and articulate Michael Ignatieff was trounced by the broadly unpopular Harper Conservatives, perhaps due to overlooking coalition opportunities with Jack Layton's far less astute populist hordes.

Though Mr. Harper is literate, he is uncommunicative, thus undoing the entire point of literacy.

As to economic literacy in Canada, Paul Martin had it nailed. He did EVERYTHING right economically, as far as I can tell, aided by his background in business.

By way of contrast, Harper, abetted by the evil Jim Flaherty and Mark Carney, overlooks no opportunity to pillory small investors and savers in the interest of minority factionalism.

So, in the US, let's keep Mr. Obama in the presidency due to his ability to speak without mangling the language, and just put Ron Paul in charge of finances.

In Canada, let's bring back Michael Ignatieff as leader based on his brilliance as a communicator (he is already re-ensconced in academia, unfortunately), and we'll return Paul Martin to the post of finance minister to save the day for our country!

Let's not let Mr. Harper throw us another curve ball!

That would fix everything important, as far as I can tell!
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Atlas Shrugged: The Movie Is Worth Seeing Despite Its Obvious Failures

15 April 2011

OK. Just caught the premiere of Atlas Shrugged: Part I this evening. I read the book in high school (at which time it was still fairly new - it was published in 1957). The movie is only on 200 screens.

In my view, Ayn Rand, the controversial and celebrated author, was not a great novelist. She used the form of the novel to express ideas about her personal philosophy ("objectivism") that had been formed by her personal survival of Russian collectivism and a genocide twice the scale of Hitler's. This woman definitely has something to say. As to the film, I was most struck by the conflicting and deeply compromised premises at its core.

Rather than seeing the film set in historical context, we find that it opens in the year 2016. Gas is $36 a gallon, everybody is unemployed, and evil politicians scheme to loot the last few of the country's wealthy and successful people.

Sound like Russia? You've got it. And we are also taken back to the original story of railroading, iron, steel and coal – and ballroom cocktail receptions. That is quite a disconnect, and at least for me, I couldn't set the railroad story in our present decade.

There are other problems. I was bugged by the characters' inability to construct grammatical sentences (“we/us,” “is/are,” basic stuff). The dialogue itself was probably taken from the book, but honestly, that is not an inspired source. Rand's characters can speak for 50 pages without taking a breath. So a lot of the pieces of the story didn't work together.

I also have the impression that the screenwriters (John Aglialoro and Brian Patrick O'Toole) don't know much about modern business. For example, and most tellingly, they stayed with Rand's notion that individuals would be outlawed from owning more than one company.

Hey, individuals don't own any major companies anymore – and don't want to! Everything has been floated on the market to exploit shareholders! Why do it yourself, when you can suck the shareholders dry?

This problem is in fact one of the contemporary manifestations of exactly the problem that Ms. Rand was trying to illustrate from the middle of another century.

That is, the evils of our age are different than those of the mid-20th century. So if we're going to set this story in 2016, then let's see the collective thinkers mired in political correctness and tortured compromises, trying to rescue the economy by destroying the currency. Hey! That is actually happening – and it would make the same point in a contemporary setting, as I think the screenwriters intended.

So, at least for me, this WAS still worth watching. I guess the producers didn't have much money or time. I understand. This is not a big budget film, and that's OK. Give them a break.

I think what everyone involved in this shoestring effort was trying to get across is that individual initiative is the only thing that can save us (as opposed, say, to organizing various factions into groups and going at each others' throats – as seems to occur on Fox News nightly!).

So yes, this film is trying to be about courageous people believing in something and doing it, not unlike trying to produce this film with no money! Good for them. It's probably still the right answer.... I commend them for trying!
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Fuel: By Josh Tickell

11 April 2011

I just watched the film "Fuel," on DVD, by my fellow New College of Florida alum, Josh Tickell.

This is basically the story of Josh's life's work. He has had an interesting life, and tells his story well. He happens to be a gifted environmental activist, plus a talented film maker.....

Josh majored in sustainable living at New College of Florida (yes, you can do that - that is, you are allowed to invent your own major, and this is what Josh did).

Basically, this film is about biodiesel. Biodiesel is not good. Biodiesel is revolutionary.

Biodiesel is NOT corn-based ethanol. It is not food-to-fuel. It returns the energy input 3:1 or better. It is safe and even edible. It pollutes less than so-called fossil-based diesel fuel. There are many ways to produce it, and more and better ways of doing it are being found all the time.

As an aside, the US can produce all the biodiesel it needs, and never has to import oil from anyplace again, if it chooses this path.

As Josh says, "War is not required."

Willie Nelson, Neil Young and Richard Branson are among biodiesel's better-known advocates.

Oh, and this film isn't only about biodiesel. It is also about how to live, how to conserve energy, the history of our present fossil fuel-based energy system, other ways to produce energy besides fossil fuels, the life story of Rudolph Diesel, a lot of Josh's own life story, interviews with scientists and business people, finance, educational graphics, statistical analysis, etc., etc. I hope you're getting the idea. My impression is that there are investible ideas here too, and why not?

Anyway, (1) you have to watch this to learn more, (2) you need to figure out how to get biodiesel and related sustainable technologies into your home, your life and your communities, and (3) you need to tell other people about this.

Again, this has nothing to do with corn-based ethanol, which is not a particularly good idea at all, at least, not much better than fossil fuels. This is entirely different. You can make this stuff from trees that grow to maturity in 3 years, from algae (thank Jimmy Carter for getting this started), from sewage sludge, etc., etc.

Again, the US does not need to import oil. Neither does any other country that wants to do this. This is good, very good.

Watch.
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Enantiodromia: The Word of the Day....

5 April 2011

The following is a comment I made on the Dollar Vigilante Blog. If a little more context will help you after reading this, then click here for Jeff Berwick's thought-provoking article ("Mortgaging Our Grandchildren's Future? That's Being Optimistic!"). In any case, my recent thoughts on enantiodromia:

Jung (the Swiss psychiatrist) used the term "enantiodromia" to describe the psychological principle of "running into opposites."

Historically, no people have ever been more opposed to centrally-planned, non-free-market economies than the citizens of the US. That, of course, has changed, and it is perhaps instructive to analyze why.

The healthcare system is one example.

Layers of bureaucracy and regulation have accreted over the years to PREVENT the emergence of government-provided healthcare in the US. The notion that government regulation can advance a free-market system has made the quasi-free-market health-insurance-encumbered US health system perhaps the most expensive in the world.

Like it or lump it, but government-run healthcare in Canada costs half as much, and for most people, it is also better.

Somewhere, the idea that the government and the Fed have the "responsibility" to rescue an economy in trouble became acceptable (our forefathers would not have accepted this idea for a moment), and the executives on Wall Street have been feeding at the publicly mis-regulated "private" trough for decades, making Animal Farm no longer an allegory (the pigs are running the farmyard).

A guy I respect (Bill Fleckenstein) says that the Fed (the US Federal Reserve Bank, headed by Ben Bernanke) has more implicit responsibility for this situation than any other body, including the big spenders in Washington and the over-leveraged risk-takers and game-players on Wall Street.

That is, easy money creates a climate in which elected representatives, business leaders, et al, simply believe they will be rescued.

And of course the public buys into this idea.

Who in Wisconsin is demonstrating in the streets, saying, "Hey, thanks for saving us taxpayers the money we can't afford to pay!"

Anyway, the greatest opponents of the centrally-planned economy have now morphed into its greatest advocates. Read more about it at the Dollar Vigilante....

Enantiodromia: the word of the day.....
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My Question to Mr. Ignatieff

31 March 2011

On Sunday, April 3, at 11:00 am EST, The Liberal Party of Canada will host a special live town hall meeting that will be streamed online at Liberal.ca. During the event, Michael Ignatieff will unveil the Liberal Platform and answer questions from Canadians.

The Liberal Party is inviting Canadians to pose questions to Mr. Ignatieff.

I have responded by submitting my question. Honestly, I don't think my question is very easy, but here it is:

"Mr. Ignatieff,

"I regard our present time as the era of investor exploitation. Mr. Harper's dismantling of the income trust program selectively harmed small Canadian investors and sold off Canadian assets to international bidders. Low interest rates punish savers and motivate investors to take excessive risks or to misdirect investments. The broad markets have been flat for a decade. In the western world, only the Australians have a different (high interest rate) policy. Capital investment (saving) is at the heart of economic growth. Do you favour restoring the income trusts, raising interest rates, and undertaking other policies to benefit savers and to restrain high-risk (speculative) activity?"

Well, I'm hoping for an answer.....

I'll keep you posted.
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Why Canada Is Doing Well

26 March 2011

Things are getting better in Canada, compared to almost every place else.

According to Niall Ferguson, here's why:

That's Canada at the bottom, trending downward. Our debt is falling relative to GDP - unlike virtually everybody else! (Australia is also doing relatively well, but it's not on this chart.)

Why?

1. We are a small country that leads the world in commodity production - mining, timber, agriculture. We have it all - including 60% of all the mining companies in the world.

2. Paul Martin (our former Liberal Prime Minister and Finance Minister) rationalized government expenditures and brought the country into surplus. He ran Canada like a business. (He was followed by an imprudent - and impudent - fellow named Stephen Harper who has gotten Canada into trouble by disenfranchising senior citizens and other savers/small investors. Fortunately, Mr. Harper has just lost his job!)

3. What Canada produces - raw materials - is in demand from the rapidly growing Asian economies. Commodities have been in a decade-long secular bull market, and that market appears set to continue into the present (upcoming) decade.

4. Both the Canadian government and Canadian banks are relatively conservative. We tend to avoid bubbles and manias. We keep speculators on a short leash.

5. We have affordable, publicly-funded health care and social insurance.

Canada is not perfect, but, compared to almost every place else, it might as well be. It doesn't get much better than this in the real world.
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The End of Extend and Pretend

23 & 25 March 2011

As a subscriber to Bill Fleckenstein's bargain-priced financial advisory service, I have the privilege of popping off questions to Mr. Fleckenstein from time to time.

Tonight, I thought I had finally grasped the fundamental paradox facing the most indebted nation in world history.

Here is my latest question to Mr. Fleckenstein (who is taking a well-deserved day off tomorrow):
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Fleck,

Sorry to trouble you on a day off, but I have a simple question.

Let's say that there is no crisis and no "flash crash" between now and June 30, and that the Fed decides to halt QE (Federal Reserve money-printing) ad infinitum.

Given that the central bank will not be buying $75 billion per month in US treasury bonds, does that not mean that there will be MORE upward pressure on interest rates?

That is, QE = more money supply (inflation), but "No QE" means higher interest rates, and eventually higher federal debt payments?

(Note: a 7% rate on the existing $14 trillion plus US federal debt = $1 trillion in interest payments per year.)

And the fix is for our elected leaders to come back to us and say, "Sorry, we can't give you what we promised you after all. We're shutting off the tap. It's all over."

I think I'm truly beginning to grasp the Catch 22. Every option is "impossible," yet as in all paradoxes, and as always through history, the paradox will have to be navigated in real time.

If I've got it right, is there a timeframe (or interest rate level) beyond which extend and pretend is no longer sustainable?
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There it is. My latest question to Fleck. I'll share any answer that comes my way.....

25 March 2011: Mr Fleckenstein replied today to my question as follows: "In my opinion, austerity is a short sale, no one will stand for it, when we can just print money. I don't think there is any set level of anything that would end extend and pretend, it will end when it does, but I'd guess it will be 'unwinding' in the next 6-9 months or so."

Again, my advice for my readers is that you subscribe to Mr. Fleckenstein's economically-priced advisory service!
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Military-Industrial Malinvestment

21 March 2011

I wish I had time to say more on this topic, but for now, here is my quotation of the day, from my friend and adviser, Ed Bugos at the Dollar Vigilante website (I recommend that you join as a subscriber):

"If the world were on a gold standard, governments could not afford the wars they are involved in today, and there’d be no question of the West withdrawing from the Middle East, because we would not be able to afford it! If, instead of printing the money, the government said that it will increase taxes for everyone by $20,000 this year to fund their ongoing intervention in the Middle East in the name of democracy, there would be a lot less "Gotta Support The Troops" going around! Without the ability to print money, there’d be no military industrial complex."

- Ed Bugos, from The Dollar Vigilante Blog

In fact, I can say a little bit more on this subject, as I commented on Ed's post at the Dollar Vigilante site, as recapitulated below:

"OK. That was an interesting twist at the end. Where does the excess money printing end up? In the hands of terrorists, despots and dictators in the oil producing nations, and in the hands of the Military-Industrial Complex on our side of the pond! Now, you could write a book on military-industrial malinvestment!

"As to the crisis that produced Reagan and Thatcher, I suspect the next one will somehow be a blend of the 30s and the 70s, but I do not know which parts will figure into the final blend. Unfortunately, it will not be pretty, and it will be the direct result of money-printing!

"What I do know is that nobody will be calling, "The bottom is in! Buy real estate/stocks/whatever now!" The bottom will appear endless, and gold will be the ONLY bright light at that point...."

That's all for now, folks!

(Credit: The poster used above and the US dollar chart below came from this interesting article.)

(Disclaimer: The above comments are not directed at any particular military venture, some of which are needed in my view, but rather at the type of world that is created by printing money rather than paying our bills....)

Additional comment: Regarding the present intervention in Libya, the application of the above lesson runs something like this: (1) Money-printing (inflationary monetary policy) made oil expensive, enriching (and arming) such despotic leaders as Qaddafi. (2) We "solve" the problem with MORE money-printing, to pay for military interventions to protect the Libyan people from the ruthless leader whose ascendancy we funded in the first place! (3) The devastating consequences? We'll "solve" that with money-printing yet again! I hope you can see where this is going.... The cycle continues literally until the currency reaches the point of inflationary collapse. Then, hopefully at least for a while, we learn to live within our means again!
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Is TV Signaling a Top in Gold?

10 December 2010

I recently had some fun reading this article on Seeking Alpha (Is TV Signaling a Top in Gold? ) and every comment on it... I guess I did this intentionally for something different to do, as my working holiday is soon drawing to a close!

So if you're at all curious about my present thinking, I have salted and peppered comments throughout the discussion section following this particular article. Alternatively, you can find all of my comments on the Seeking Alpha site here, though they are out of context on the summary page.

In brief, the author of this article, Yoni Jacobs, has some fun with the idea that a recent gold prospecting reality TV show ("Gold Rush Alaska") might be signalling a top in the gold market, just as house flipping shows accurately signalled a top in the US real estate market perhaps 5 years ago. However, I found both the article and the discussion on the site to be so gold bullish that I actually added to my (short-term) positions in both gold and silver mining companies while in the midst of the discussion with other participants.

I made quite a few comments, and I won't repeat them all here. Perhaps the most fun idea was this one...

" OK, try this. Let's say one of the prospectors on this show runs into a motherlode and becomes a billionaire. Will we then see more imitative shows? For sure.

"However, how long does it take to develop a mine? Maybe a decade - not unlike developing new medicines. It is very slow and difficult, even if you have millions of ounces (look at Novagold for example, even with Paulson and Soros onside). So about the time he (or she) actually is a billionaire, we probably really will be in bubble territory in gold! So perhaps this is a predictor after all - with a ten-year time lag."

I also offered some thoughts in reply to CLH, who made this statement: "These comments answer my question--Is gold going up or down? 99% of the comments say up. For this reason I say down."

My reply:

"CLH... you are not conversing with a crowd of shoeshine boys here. (Comment: It is said that Joseph Kennedy sold all his stocks prior to the onset of the great depression when his shoeshine boy offered him a stock tip.)

However, the QUALITY of the arguments against gold is what triggered me to add to my Goldcorp and Pan American Silver positions today. That is, those who are arguing here against the gold bull are dissuaded from investing by quite minor concerns, indicating that there is not yet a clear view of what the gold bull is and the actual dynamics driving it. When the arguments against gold are based on substantial factors, then I will think twice about my long positions.

"For example, if the anti-gold camp were arguing that Ron Paul stands a substantial chance of forcing the Fed to reverse course, I would sit up and take notice. (Comment: Mr. Paul was recently appointed chairman of the Domestic Monetary Policy Subcommittee of the US House of Representatives. He is the most vocal critic of the Federal Reserve in congress.) I hope you understand me. That would be a substantial development. However, Ron Paul doesn't have anywhere near the kind of following he would require - even in Texas - to turn this juggernaut around.

"Or if you could tell me that interest rates aren't going to rise (and increase interest payments on US federal debt to above the $1 trillion level), then I might think again. In fact, to digress to the interest rate issue - certainly rising interest rates will compete with gold for the attention of investors. but again, you have to have an analysis. If interest rates are rising because it is the end game for fiscal imprudence and its inevitable consequences ("Squanderville"), then that will not in fact draw investors out of gold. Do you see what I mean? Actually, I don't think I have seen a single argument here that militates against gold in terms of the fundamental reasons why it is rising. Thus my emboldened status as a gold investor, even to buy more today for the first time in several weeks."

One participant (TW) made this reply to one of my statements: " There are two sides to your argument, are there not? One is the side that you have presented. The other would be that the miners have not tracked with gold because the valuations on gold are unrealistic or unreasonable. One could postulate that the HUI:GOLD ratio will return to the mean through a price correction in GOLD."

I replied to TW as follows (my last comment):

"Todd. If gold is not in a bull market, then you are correct. My analysis and action all follow from that basic assumption, which we have discussed elsewhere.

"As to my investment philosophy, my strategy is to find a bull market and stick with it long-term. So far, the gold market has cooperated with that assumption, and the miners have given still equivocal affirmation! (I started buying in this sector in 2003, and wish I'd been there in 2001!)

"I will certainly begin to question my assumptions if at some point in the fairly near future the miners can't get onside in a more definite way! (I think they started this fall, by breaking out and up, as I have noted elsewhere.) However, bull markets have been widely documented to be volatile and frustrating. Investing is not gambling, because everybody can win. But that doesn't mean everybody WILL win in every sector at any given time. So yes, I'm trying to find the right place to be, and the signals are never 100% clear."

For more of this stuff, and for the ideas of many other contributors as well - many (perhaps not all) of them quite intelligent - click here.
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