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Saturday, July 4, 2009

4th of July: America's Dependence-on-China Day

It is estimated that the continuing trade surpluses for years have helped China amass a whopping two trillion US dollars in dollar-denominated assets. Last year alone, China added US$450 billion to its reserves at a rate of over a billion dollars a day. About half of the Chinese US dollar-based assets are in the form of US treasury bonds that fund the ballooning US deficits. Gao Xiqing, president of the China Investment Corporation, recently told James Fallows of the Atlantic Monthly, "Be nice to the countries that lend you money". Gao was clearly hinting at this new reality of " balance of financial terror" shifting in China's favour.

There can be no doubt that there are now two dominant economies in the world today: China and the United States. However, while China dominates as the new growth “engine” of the world economy, the U.S. dominates as the largest dead-beat the world has ever seen – trying its best to borrow the surpluses of all the world's productive economies. And what will happen to its economy depends very much on Europe, Japan, and particularly, China deciding that the American dollar is actually worth what the United States says it is.

Meetings were held in June 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 major trading nations to replace the dollar as the world’s reserve currency. If they succeed, the dollar will dramatically plummet in value, the cost of US imports, including oil, will skyrocket, interest rates will climb and US jobs will hemorrhage at a rate that will make the last few months look like boom times. The United States will begin to resemble the Weimar Republic or Zimbabwe.

“Yekaterinburg,” Hudson writes, “may become known not only as the death place of the czars but of the American empire as well.” His article is worth reading, along with John Lanchester’s disturbing exposé of the world’s banking system, titled “It’s Finished,” which appeared in the May 28 issue of the London Review of Books.

“This means the end of the dollar,” Hudson says. “It means China, Russia, India, Pakistan, Iran are forming an official financial and military area to get America out of Eurasia. The balance-of-payments deficit is mainly military in nature. Half of America’s discretionary spending is military. The deficit ends up in the hands of foreign banks, central banks. They don’t have any choice but to recycle the money to buy U.S. government debt. The Asian countries have been financing their own military encirclement. They have been forced to accept dollars that have no chance of being repaid. They are paying for America’s military aggression against them. They want to get rid of this.”

China, as Hudson points out, has already struck bilateral trade deals with Brazil and Malaysia to denominate their trade in China’s yuan rather than the dollar, pound or euro. Russia promises to begin trading in the ruble and local currencies. The governor of China’s central bank has openly called for the abandonment of the dollar as reserve currency, suggesting in its place the use of the International Monetary Fund’s Special Drawing Rights.

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.

The implication is simple: if you think that you still have some money, let's hope that you don't mean that you have something or other denominated in the US Dollar.

P.S. More of the same and
YouTube commentary Part 1 and Part 2