The sheer size of US debt and the realities of our ability to pay this money back has come under fire by individual Americans and foreign governments alike. Anyone who has been paying attention understands that there are really only two options left for the US government when it comes to our debt – and paying it off is not one of them. Either we will default on our loans, a situation made plausible by none other than Tim Geithner at the beginning of the year, or we inflate the debt away.
Any astute investor knows this. And the Chinese government certainly qualifies as astute.
They know what’s coming.
That being said, it’s no surprise, then, to see high level Chinese business and policy leaders let their plans slip out from time to time. The most recent comes from Li Daokui, an economist and adviser to China’s Monetary Policy Committee:
Via Steve Quayle:
A key rate setter-for China’s central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.
“The incremental parts of our of our foreign reserve holdings should be invested in physical assets,” said Li Daokui at the World Economic Forum in the very rainy city of Dalian – former Port Arthur from Russian colonial days.
“We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”
“Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries,” he said.
The Chinese are clearly vexed with Washington, viewing the Fed’s QE as a stealth default on US debt. Mr Li came close to calling America a basket case, saying the picture is far worse than when Ronald Reagan and Margaret Thatcher took over in the early 1980s.
Mr Li, one of three outside academics on China’s MPC, described the debt deals on Capitol Hill as “just trying to by time”, saying it will not be enough to stop America’s “debt dynamic” turning dangerous.
Source: Ambrose Evans-Pritchard
We’ve heard the arguments that China and the US have a symbiotic relationship, and that China essentially has no choice but to continue buying our debt. If they stop, or try to diversify their assets too overtly, then it would not only collapse the United States, by China as well.
We don’t disagree with this assessment. However, it is our view that the Chinese would be willing to drop into depression if it meant permanently dethroning the United States as the world’s “only super power.” Mutually assured destruction is a policy of their government just as much as it is of ours.
From time to time we hear statements from influential citizens of China. Because all business and policy in China is commanded and controlled by the Chinese government, we can rest assured that Mr. Li’ recent musings are state sponsored. Even if he didn’t mean to let them slip out, it is a window into the goings-on behind the scenes in Chinese economic planning and war gaming circles.
While we can’t predict exactly how such a scenario would play out, in his book Indivisible, author Troy Grice depicts one such possible end game of a Chinese liquidation of assets:
Note: Mae is an assistant to the Secretary of the Treasury who just returned from a trip to China, where she was told that the Chinese would no longer be investing in US Treasury debt. ‘T’ is the Secretary.
“Things are very shaky right now, Mae. I mean we are really on the razor’s edge. The problem isn’t China so much—we know what they’ve been doing with their recent liquidations. The real issue is Japan. They’ll be out of cash in a matter of weeks. We don’t know if they’ll default on their debt or start selling off assets. If they start selling assets they’ll start with U.S. Treasuries. With China selling too, we’ll have to make sure they don’t whore up the market too fast.”
“What’s ‘too fast’?” Mae asked.
“We’re hoping for…well…we’ve been calling for an ‘orderly crash’. We need to slow things down so our banker partners can get out. If the banks get caught hanging in too long then it could be a real wild ride. We’re talking the mother of all bank runs. Money markets’ll break the buck. Mutual funds will dissolve. Pensions, government payrolls, AR factoring, inventories, everything is at risk if the panic infection spreads. The Fed’ll have to take over the entire banking sector and guarantee everything…monetize everything. It’ll be a big, big mess.”
“So are we talking months? Weeks?”
T shook his head. Mae knew that to mean days.
“It’ll still be a selloff of unprecedented magnitude.”
The guard raised the arm and the SUV passed out of the ambient natural light and fully into the deeper dungeons of the complex.
“The Fed can slow it down by using the Wall Street operatives to buy up whatever the Japanese and Chinese sell with keystroke cash. But the huge volumes will trigger manual overrides at some point. With living, breathing animal spirits at the controls, it becomes a confidence game.”
Source: Indivisible by Troy Grice
Free online version
Once the confidence is lost, the whole paradigm shifts.
When we hear influential Chinese figures use the word “liquidate” in the same sentence as “US Treasuries” then we really need to be paying attention. This may be just rhetoric today, but tomorrow it may be policy.
As Grice’s Indvisible, Rawles’ Patriots and Nova’s American Apocalypse illustrate, if such an event were to occur, and China actually did pull the plug, we could very well be looking at a complete meltdown of our economic, financial, political and social systems.
Recovery for such a collapse would be measured not in months or years, but decades and generations.