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Friday, January 23, 2009

Chinese Massage with an unhappy ending

I have wrote previously of the relationship with China and the USA that has helped get the US and in effect the world to where it is today.
Quick synopsis, America gives US dollars to Chinese for goods and services. Chinese government buys US bonds, giving the "cash" to American government and basically sits on US bonds. The cash is in effect returned in the USA to repeat the process.

America is a debtor nation. It could not get to where it is today without a "sponsor" of debt. The world has been enabling our debt habit. Once the cracks starting to appear in the USA, back in 2007-08 there was calls for "decoupling" and that the US may hit a recession, but the world won't. Fast forward today, and the world is hurting as bad if not worse than the USA. Further, China is hurting. It is theorized in Q4 of 2008, China had ZERO growth. That seems unheard of, and further sets up for negative growth?

Through this whole process, China has rattled the cage, to set itself up as possibly new world financial leader. Several reasons why this isn't a crazy proposal. First, China isn't a debtor nation. Second, lets face it, China makes the "stuff" the world uses. That means everyone gives them their money for goods. And lastly, China has about 2 trillion of US bonds it can try to use as a weapon to "hurt" the US if the US crosses them. Obama administration, to their credit, is already providing an alternative to a Chinese financial land-grab, by proposing "international" sharing of power.

So US-China relationship has helped contribute to the long term "prosperity" of the world economy through spending. The relations have been getting a little more tense as the world economy shifts. Obama enters office and starts trying to set the tone with China that the USA won't be pushed around by China. Treasury Secretary Appointee Geithner states "China Is ‘Manipulating’ Yuan"

China in turn is a net seller of US Long Term T-bills in Fear of USA Capital Outflow and Deficits. I find it real interesting that Bernanke said that the Fed may start to buy "the long end of the curve" (longer term bonds) from the treasury at the same time when China is looking to sell those same bonds. Reminds me when corporations "buy back stock" just as major stock holders are dumping.

For now, the US and China continue to posture with each other to see who damages the relationship severely first. Hopefully life as usual continues, with little impact. But the backdrop story of the world economic recession is these two players in this 20 year long dance. The US obviously wants the Chinese to finance the American debt way of life, while China wants to "get what it wants" in exchange for funding US efforts.

Once again, this is yet another reason why I am looking at and playing with (cheap) resources to hedge storage of wealth. Barron's cover says "get out of bonds NOW!", I wouldn't go that far, but keeping in bonds needs to be questioned and slowly shuffle for the door. Then again, Barron's record has been so horrific in the last year, maybe bonds are the best place to be for quite a while to come.

TLT has been dropping, as Obama spending speech winds up, and the bond market usually is credited with seeing the horizon before the equity markets.

Lets just hope as the American's continue pay for Chinese services with debt notes, this all ends happily.

Old video, very funny


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