If you use US dollars, get paid in dollars or need to borrow like the government at a rate of 3.5 Billon per day you need to know what the Chinese think. This past Friday I wrote a missive on why what the Chinese Dagong Global Credit Rating rating, who is not recognized by Wall Street or Washington was much more important than they are given credit. So lo and behold in a Bloomberg article dated today(8/16) “China Favors Euro Over Dollar As Benanke Alters Path”. The article is interesting, dear reader, and never mentions Dagong Credit but the message is along the same lines as the Chinese ratings agency’s claims against US debt. The Chinese have been key buyers of US Debt which has allowed the Government to do many things over the past few years including the stimulus bill totaling around $800 Billion.
Now the Chinese are following their own credit agency’s advice and taking action to diversify their debt holdings. The consequences of this action put the US at a disadvantage on an economic footing as well as potentially a more serious national security issue. For now, let’s just deal with the economics of this situation. The inability of the US to sell bonds to the Chinese will cause funding problems in the future, unless we revert to more of an austerity path, which in this writer’s opinion based upon looking at those in power as well as several decades of past history is unlikely.
In some respects while the Chinese are looking out for their own interests by diversifying they may also be trying a roundabout method of forcing US austerity by not funding government bloat and harebrained schemes. Additionally, this could be viewed as an attempt by the Chinese to force Bernanke to the carpet to assure themselves that their assets are protected.
It is difficult to know the true motivations of the Chinese because their economic system, thought patterns and closed nature of government and markets are alien to those of us in the West. As stated in my prior article we in the West tend to look at the rest of the world in an ethnocentric manner, meaning we believe that everyone is just like us. In other words their market participants act and react the way we do, which is patently false. For example, here in the US people in the investment industry tend to view something like gold as a barbarous relic, while people in India and all over Asia view it as wealth(a store of value). Who is right? That is a debate for a different day, but what is clear is that your background and culture color your perceptions and even your expectations and therefore your reactions.
What is clear is that the pie in which the US sells its debt has shrunk and the number willing takers is decreasing since their competitors are viewed more attractive by one of the largest consumers of the debt. The US needs to sell too much debt to be able to rely on the periphery buyers. In my opinion this is has the potential to set up for a much larger quantative easing then most expect. I do believe that Mr. Bernanke will fire up the helicopters to drop money from the sky and buy up whatever pork Washington will produce. He is more concerned with protecting the banks than the people of the US so this will ultimately lead to the US Dollar being sacrificed on the altar of monetization, since the Chinese have basically said “No Mas”.