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In the REAL World Series of Poker, the Stakes are Default of Sovereign Debt

smartknowledgeu's picture




 

In today’s financial world, a real life, real-time economic
World Series of Poker is being played out before our very eyes between the
Central Banks of the world’s largest economies.  As opposed to the annual Las Vegas World Series of Poker
tournament, the buy in at the Central Bank World Series of Poker table is
exponentially steeper, in the range of trillions of dollars, yen, and Euros
that have been used to monetize the world’s debt, and the stakes are default of
sovereign debt and the accompanying collapse of that domestic fiat currency. Like
the annual Las Vegas World Series of Poker tournament, there are players like
the UK, the United States, and Japan, that have terrible hands (an obscene amount
of debt and/or just too large of a domestic currency base in relation to its country's GDP) but are deploying bluffing strategies as a ploy to delay the
inevitable, while players that possess strong hands like China (a strong
surplus) also continue to bluff as a ploy to buy more time to execute its exit
strategies (think bank robber Clive Owen’s bluffs to buy more time in the film
“The Inside Man”).

 

For now, the two biggest players roundly discussed in the
media are clearly the United States and China. And as with every WSOP
tournament, there is also a sleeper that everyone ignores in the beginning that
ends up proving a worthy player by the tournament finale. In this case, this
sleeper is represented by the Middle East Sovereign Wealth Funds with their hundreds
of billions of petrodollars.

 

The below is the timeline of China’s bluffs over the last
several weeks.

 

First, on February 9, 2010, this:

Chinese has blasted the United States over the planned $6.4
billion arms package for Taiwan unveiled in late January, saying it will
sanction U.S. firms that sell weapons to the self-ruled island that Beijing
considers a breakaway province of China…

"Our retaliation should not be restricted to merely
military matters, and we should adopt a strategic package of counter-punches
covering politics, military affairs, diplomacy and economics to treat both the
symptoms and root cause of this disease," said Luo Yuan, a researcher at
the Academy of Military Sciences. "Just like two people rowing a boat, if
the United States first throws the strokes into chaos, then so must we." Luo said Beijing could "attack by oblique means and
stealthy feints" to make its point in Washington. "For example, we
could sanction them using economic means, such as dumping some U.S. government
bonds."


Then, on March 7, 2010, this:

Any speculation that China might stop supporting the dollar
in the next few years is absolute nonsense, a top state banker said. Li Ruogu,
chairman of Export-Import Bank of China, a lender tasked with supporting the
country's foreign investments, said in a group interview that a collapse in the
dollar's value would damage Chinese interests. China should focus instead on
trying to stabilize the dollar and on preserving its status as the leading
global currency, said Li, a former deputy central bank governor. Asked whether China should continue to back the dollar, he
said: "I believe that, for now, supporting the dollar's stability and its
international currency status is good for China."

 

Thus it appears that in China, different factions are opting
to communicate a disjointed, disunited front regarding their position on the US
dollar. From a historical perspective, one would be well served to believe the
exact opposite of whatever a banker states. In this case, one would surmise
from Mr. Ruogu’s statement that China plans to dump dollars every chance they
have, an action that would be congruous with the statements of their less
diplomatic (from an economic perspective) and more aggressively inclined military
leaders. In any event, given that Chinese politicians, bankers and military
leaders have for the past year, delivered a series of incongruous public
statements regarding their support/lack of support for the US dollar, no one but
foolish analysts that regularly appear on mainstream media channels, really
believes any of the public statements delivered to the media from the Chinese.

 

Furthermore, US analysts that continue to state that China
is “trapped” by their large amounts of US dollar denominated debt and cannot
offload their dollar denominated debt obviously know nothing about poker. The
player with the strongest hand often may not win in poker, but they always have
many more exit strategies at their disposal that will yield success than
players with weaker hands. To believe China has no way out of this situation is
patently foolish. For players with strong hands and a better cash position
(which China possesses), there are always ways out that will yield acceptable
results.

 

To counter China’s bluffs in the world series of poker, the
US has elevated its tactical bluffs.

 

On March 14, 2010, the US press reported the following:

"It's going to be really hard for them yet again to
fudge on the obvious fact that China is manipulating. Without a credible
threat, we're not going to get anywhere," said Paul Krugman, this year's
Nobel economist. China's premier Wen Jiabao is defiant. "I don’t think
the yuan is undervalued. We oppose countries pointing fingers at each other and
even forcing a country to appreciate its currency," he said yesterday.
Once again he demanded that the US takes "concrete steps to reassure
investors" over the safety of US assets.


This was followed by the below, on March 15, 2010:

A bipartisan group of 130 U.S. lawmakers issued an open
letter Monday, calling on the Obama administration to label China a currency
manipulator and impose sanctions. In the letter addressed to Treasury Secretary
Tim Geithner and Commerce Secretary Gary Locke, the Congress members said the
yuan was overvalued, resulting in an unfair subsidy for Chinese exporters.
"The impact of China's currency manipulation on the U.S. economy cannot be
overstated," the letter said. "U.S. exports to the country cannot
compete with the low-priced Chinese equivalents, and domestic American
producers are similarly disadvantaged in the face of subsidized Chinese
imports."

It called on the administration to include China in its
currency manipulation report, due out next month, and urged the Commerce Dept.
"to apply the U.S. countervailing duty law in defense of American
companies who have suffered as a result of the currency manipulation." It added that such moves "must be done in concert with
intense diplomatic efforts, not only with China but also with the IMF and
multi-laterally with other countries." One of the letter's authors, Rep.
Mike Michaud, D- Maine, said in a statement that the status quo could threaten
U.S. businesses and impede recovery in the labor market. "If the
administration fails to act on this issue it will hold back our economic
recovery and hurt the ability of American small businesses and manufacturers to
increase their production, keep their doors open, and create jobs,"
Michaud said in a statement on his Web site.

 

Every single major Central Bank in the world holds a
significant amount of US dollars. How many of these same Central Banks hold significant
amounts of Chinese renminbi (yuan)? Quite obvious to anyone with an IQ above
room temperature, though a Nobel prize winning economist can’t seem to figure
this simple truth out, given the position of the US dollar in the global
economy versus the position of the Chinese renminbi in the global economy, the
shameful, manipulated weakness of the US dollar negatively impacts the world
economy to a much greater significant degree than the manipulated strength of the
Chinese renminbi.  The US Federal
Reserve’s manipulation of the purchasing power of the US dollar hurts the
“ability of American small businesses and manufacturers to…keep their door
opens” to a far greater extent than the Chinese government’s manipulation of
renminbi strength. For 130 Congressmen to state that Chinese renminbi
manipulation is the cause of US economic failure illustrates either:

 

(1) their
complete and abject failure to understand how the US dollar-based monetary
system works; or

(2) that they have sold out to banking interests, and in an attempt
to hide their paid-off status from American citizens, they have initiated the
blame game instead of the assumption of personal responsibility (a tactic often
taken by politicians during times of economic duress, i.e., Nazi Germany).

 

To address the 130 Congressmen’s accusations of foreign
currency manipulation, of course the Chinese central bank is a manipulator of
yuan. This accusation in itself, is nothing short of dull and unworthy of media
attention. All Central Banks in all countries manipulate the value of their
currencies, including (though this may be a shocker to those 130 fools we call
Congressmen), the US Federal Reserve.
If Central Banks set interbank lending
rates in their countries and do not allow free markets to set these interest
rates (as they do), then by definition, they are manipulating the purchasing
power of their domestic currencies (and they most frequently manipulate
currencies in a manner that is the most destructive to the wealth of their
nation's citizens).

 

For these 130 Congressmen to fail to acknowledge the fact
that the Bank of England’s manipulation of the pound sterling, the ECB’s manipulation
of the Euro, the Bank of Japan’s manipulation of the yen, and the US Federal
Reserve’s manipulation of the US dollar are the events that have brought the
world to the brink of economic disaster only displays their utter incompetence
in executing the job with which the public has entrusted them.  Furthermore, the strategy of attacking
the player with the strongest hand also demonstrates a shocking ignorance of
the culturally specific concept of saving face.

 

In Asia, people charged with assault or murder often explain
their acts as the consequence of “losing face” over a slight – a slight that in
most other cultures, might produce a well-timed expletive as the strongest
response. In the case of the Chinese government, there is no doubt that “saving
face” before a nation of billions is important to them and that they will not
respond favorably to US politicians that attempt to strong arm them into revaluing their renminbi at a higher level while failing to acknowledge the
“in the worst interest of all American citizens”, manipulative weak US dollar policy that
the US Federal Reserve has instituted since 1913.  If I were an advisor to a US Congressman, and given my
understanding of Asian culture, I would say that their present scheme may
quite possibly be the worst possible tactic to employ in dealing with China in this current world currency poker game.

 

In the end, though the REAL World Series of Poker, an
essentially silent economic war between West and East, started many years ago
(think of the US Congressional mandate in 2005 to block the Chinese National
Offshore Oil Corporation’s bid for US oil company Unocal as well as the current
Google-China squabble), the table with the highest stakes is the one that
addresses the race of the world’s major currencies to the bottom. How this race
plays out among the various players at this table will determine which country
is the first to default on their sovereign debt. There are two excerpts from a
Chinese text believed to be thousands of years old, the Tao Teh Ching, that one
should be aware of when assessing the bluffs of the players that sit as this
table.


“Where the ruler is mum, mum, the people are simple and
happy. Where the ruler is sharp, sharp, the people are wily and discontented.”

“You govern a kingdom by normal rules. You fight a war by
exceptional rules. But you win the world by letting alone.”

 

There is little doubt in my mind that China wishes to “win
the world” and assume the mantle as the world’s number one economic power. Remember
that about a year ago, China reported that it secretly doubled its gold
reserves over a prior 6-1/2 year period during which it reported its gold
reserves as unchanged. In my opinion, the Chinese have likely accumulated a
significant amount of gold (and silver) beyond the amounts that they have publicly
disclosed last May. They were quiet for 6-1/2 years as they accumulated gold
(and still probably have yet to disclose their REAL reserves).  So why would anyone be foolish enough
to believe that any official Chinese government or banking representative would
disclose their strategies well in advance of execution today? We leave such
blunders to men like British PM Gordon Brown, who cost English citizens at
least £7 billion by pre-announcing gold sales of 395 tonnes when he served as his
nation’s Chancellor of the Exchequer. As I said, only the most foolish and most
prominent talking heads in US media assign any credibility to the words of men
like Li Ruogu.

 

And don’t forget the dark horse of the Middle Eastern
Sovereign Wealth Funds that I mentioned earlier. Before the WSOP tournament
winner emerges, the dark horse will have had a say in the final outcome. Cumulatively,
the OPEC nations of the Middle East own hundreds of billions and perhaps more
than a trillion of petrodollars that are invested in very secretive and private
Sovereign Wealth Funds. Yet, just as the US media seem to polarize race
relations discussions in the US to black and white and ignore Latinos and
Asians in the public discourse, the Western media seems to believe that the
WSOP fiat currency game has only two players – China and the US. This belief is
either due to a massive oversight or to blind ignorance to the importance of
other dark horse players.

 

The Abu Dhabi Investment Authority (ADIA) alone has been
rumored to hold anywhere from 500 billion to nearly a trillion in
petrodollars. Historically, the unspoken deal maintained between the US and
these Sovereign Wealth Funds was for these petrodollars to be re-invested in US
stock markets (among other things). But with the manner in which some Middle
Eastern Sovereign Wealth Funds were suckered into bailing out many large US
banks in the past several years, it is doubtful that any significant amount of
petrodollars will be reinvested in US stock markets in the next decade. Thus,
what Abu Dhabi and some of the other larger Sovereign Wealth Funds decide to do
with their petrodollars makes them a very worthy player in this World Series of
Poker.  For example, the ADIA sued
Citigroup for $4 billion for fraudulent misrepresentation in December 2009 for
a deal in which they are obliged to convert bonds it bought in November 2007
into $7.5 billion of ordinary shares at a price between $31.83 and $37.24 a
share before September of 2011!
The share price of Citigroup is currently $4.04, so undoubtedly the ADIA
has since been enlightened and now realize that there is a snowball’s chance in
hell that this deal will work out for them (Source: Times Online).

 

In Asia, it is not rare to meet an extremely wealthy individual
without ever realizing the enormous magnitude of their wealth (especially with
old money, not particularly so with new money) as Asians are much more inclined
to hide their real wealth from prying eyes than Westerners. Asian government
leaders and bankers can be expected to embrace this same philosophy. Don’t be
surprised when the second phase of this currency crisis kicks in, if it is
discovered that a number of Middle Eastern and Asian countries possess a great
deal more gold, silver and hard commodities in their Sovereign Wealth Funds
than they have ever publicly disclosed in prior years.

 

 

 

 

 

 

 

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Tue, 03/23/2010 - 15:08 | 273489 equity_momo
equity_momo's picture

This is a very flawed analysis of the situation.

Making the assumption that China wants to be the pre-eminent super-economy of the World for starters is off base. China has proven over its history that it doesnt like meddling in foreign affairs or geopolitics in return for outsiders not meddling in its domestic policies. It is far more introvert than anyone thinks.

A weak dollar policy conducted by the fed allows the chinese to conduct a weak yuan policy. There is little to discuss regarding exchange rates in this debate , the point is entirely irrelevant.

China relies on a strong US middle class essentially. They have built and stored for a World that does not and will not exist. With their demographics and simple geography they are far more worried about maintaining domestic control than taking on anyone in a pissing contest globally. They bluff better than the US , but the US have sharper cookies contrary to what many here believe , and will call that bluff and WIN because China has more to lose.

In a game of scorched earth , theres nothing to replace the dollar as a World reserve currency in the global ponzi credit scheme - the US can simply default on its debt in an end of game scenario. China will be left screwed. No savings. No export market. See how well your "urbanisation" and domestic consumer middle class holds up in that scenario - trust me , not well. Will be wiped out and with it goes the Politburo. Same will not happen in a fat and lazy USA which NEEDS to be radicalized to survive. This would be just the ticket. 

We then go through another global depression , hard times for all (its going to happen one way or other) and then the US through its still superior technological , industrial and military advantages rebuilds at a far more rapid pace than anyone else.

 

Investors have short memories. The US losing triple AAA means there is no AAA anywhere. Its not a zero sum game. Its a heads we win , tails you lose , in favour of the US.

 

There is gonig to be pain , we have witnessed peak credit , and the system requires resetting. The US still hold the aces in deciding how the system is reset , not china.

The herd think otherwise , but then you know what happens to the herd.

Tue, 03/23/2010 - 14:30 | 273440 SNAFU
SNAFU's picture

A Chinese CPA friend who has been in US 10 years had some interesting points.  Her Dad is on the mainland, not a party member, and made a mil[$] or so w/some small biz's.  She said if the US wants to, it could freeze the ChiComms UST holdings.  US received cheap goods and China got some pieces of paper.  [Of course if this did occur, other holders of UST might sweat a bit.]  Her next point was the US is the top of the pyramid with its military supremacy[over govts if not 100 rag-tag rag heads] and Anglo-speaker and NATO clubs.  Her last point came from an angle I didnt think of: China is a colony of the US.  Its leaders sold out Chinese citizens to the West[its banking cartel].

 

While people in China will be buying alot of toothpaste and cars in the future, I feel we in the West overly emphasize the true weight of their growth momentum and underemphasize the greenness of our grass.  It is a fact that  the human mind  makes both bad and good situations worse than they really are.  Suicide and gambling[overly positive] represent the two extremes.  As the cliffs below Monaco's casino prove, gambling leads to suicide.

 

My point is theres more to geopolitics than lender vs borrower:

1.military

2. my gang is stronger than your gang: cultural mojo and GDP of Anglos & NATO vs a country 30 years from being a 4th world basket case]  They are catching up but not in 2020; more like 2070.  

3. Grand Illusion factor: maybe they are a colony of Club Fed and they are being used to justify war machine spending by NATO? 

Tue, 03/23/2010 - 12:53 | 273343 Comrade de Chaos
Comrade de Chaos's picture

1) Agreed on the poker tournament and the degree of bluffing.

2) Disagree on the China hand. It is as bad as ours, while the degree of their debt is questionable and they have certain resources, don't forget that they must have their economy pumping in order to limit the social unrest (plenty of people there are unhappy, don't forget their summer 2008 demonstrations and deaths.) It's also not easy for them to sustain such a large population with food, their water resources are in much more dreadful state than ours. And don't forget that they are still dirty poor, while their government has plenty of cash reserves, and average urban Chinese doesn't. 

 

My point is, most of us (but maybe resource rich CANADA, BRAZIL and Australia) have pretty bad hands at the moment. None have clear dominant position nor advantage. That's why the only remaining advantage is the first move leverage, whoever moves first, loses the least. 

Tue, 03/23/2010 - 11:18 | 273217 dnarby
dnarby's picture

(Waits patiently for Chumba and Gekko to chime in)

Tue, 03/23/2010 - 13:45 | 273395 The Disappointed
The Disappointed's picture

'GOLD BITCHES!'

Happy now?

Tue, 03/23/2010 - 11:17 | 273216 steve from virginia
steve from virginia's picture

 

I disagree with the basic premise, that focuses on debt rather than productivity.

China is losing its productivity edge because it has been prosperous and wants to enjoy the fruits of its prosperity before they fall off the tree and rot. China's productivity is being eroded by its millions of new cars, thousands of miles of new freeways, millions of new suburban- style housing and workplace units and an increase in energy consuming infrastructure, generally.

China cannot stand to have it both ways; to be productive means being poor and appreciating its advantages which is mainly cheap labor and cheap coal.

America has no choice but to increase top line labor production and labor productivity. This means less automation - we have too many unemployed and our skill base has eroded dramatically as it is. It also means less and less consumption. The US 'consumers' - not the dimwitted government - is moving in the right direction; a critical mass are cutting back. The Chinese are as clueless as our government is.

Our economy is at the upper bound for energy prices right now and swing producer activities makes the dollar a hard currency - that is it is stable against a valuable basis or reserve. One consequence is the dollar is now a conservation proxy for depleting crude oil. We may not want to conserve the real thing but simple miserliness will force conservation of crude oil's proxy.

You may or may not 'believe' in the Peak Oil 'Theory' but the action in Europe, China and in the commodities, debt and currency exchange markets indicates that the smart money is not only believing but acting in ways that suggest Peak Oil took place quite awhile ago.

The upshot is the world's economies will shift from promoting waste in exchange for whatever currency toward arbitraging various forms of money in order to buy dollars and 'energy security', whatever that means.

Welcome to 1931.

Tue, 03/23/2010 - 10:37 | 273156 B9K9
B9K9's picture

I like your analysis. What you are describing vis-à-vis China vs Anglo-America is simply an update of the great game: he who controls central Asia controls the world.

With over 1.3 billion citizens, China could easily mount a 100m strong army to march over the steppes, overwhelm US defensive forces and occupy the ME oil fields practically at their leisure.

The US is at a terminal state; we have been internally weakened and externally exposed. All we have left is 6,000 nuclear weapons and 11 carrier groups supporting Ben's bluff over the $USD. In either a conventional conflict in central Asia, or trans-pacific nuclear exchange/war of attrition, we don't stand a chance.

 

Tue, 03/23/2010 - 08:00 | 273066 SWRichmond
SWRichmond's picture

The central banks absolutely are playing a global game of "last man standing".  Strength in the commodity currencies reveals the stress that the fiat-masters are experiencing.  Where is the promised Gulf currency?  Threatened into the shadows?

Tue, 03/23/2010 - 05:07 | 273026 AnAnonymous
AnAnonymous's picture

Who has a strong hand?

The guy who is deep in debt when stuff is abundant and is able to go deeper in debt or the guy who has savings when stuff is abundant and will roll over the savings till stuff grows scarce?

Maybe time to factor in that Earth is going to yield less and less supportive resources to human societies. A race to consume up the Earth resources is going on, being deep in debt timely is the path to success as saving untimely is the path to failure.

The more time passes by, the more the US debt grows, the less it is the issue of the US.

Tue, 03/23/2010 - 11:49 | 273243 Mercury
Mercury's picture

No AnAnon, it's time to factor in that self-aggrandizing governments of advanced social democracies (that includes the US now) are going to yield less and less to the human societies they are supposed to work for.

Who's going to fold first? This could be a "tell" - BRK bonds now spread negatively to Treasuries:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYUeBnitz7nU

Tue, 03/23/2010 - 13:25 | 273378 AnAnonymous
AnAnonymous's picture

The self aggrandizing governments is a powerful tool in the ongoing game: this has warranteed that anytime a large portion of the wealth put on the table was captured by those countries.

Everything else being equal, a country without such governmental devices will be beaten in the consumption race by another country with governmental devices.

Tue, 03/23/2010 - 06:17 | 273046 smartknowledgeu
smartknowledgeu's picture

that's why I used the poker analogy. The guy who is deepest in debt can only go deeper in debt if those with whom he's playing the poker game believe he will make good on his outstanding debt with a currency that can hold its values. no poker player and ante up with gold and agree to accept dollars in return. once the other players lose faith in the guy to pay his debt in a currency that can hold its value, his gig is up and he has to fold. those countries deepest in debt have depended upon other countries to keep buying their debt to fund their annual budgets but once other countries fail to buy their debt, then monetization of debt occurs, then inflation, then possibly hyperinflation. the more the US debt grows the MORE of an issue it will be for the US, possibly as early as 2011. Furthermore, I disagree that "stuff" is abundant. Water resources are drying up in developing countries and will become a point of contention in the next decade. Soaring food prices (caused by devaluing world currencies) will also very likely become an issue.

 

 

 

Tue, 03/23/2010 - 14:46 | 273455 hbjork1
hbjork1's picture

smartknowledge...:

Thanks for the post. 

Are they all hoping that if they hang on long enough,somehow, the problem will go away.  What alternative is there? 

As an engineer, I was well positioned to observe that engineers TEND to become tools of their tools.  If a person has a paticular, knowledge, capacity, strength or collection of physical tools there approach to solving problems, even objective ananlysis,  is biased by that tool set. 

And, of course, it isn't just engineers.  In my youth, a respected lawyer (ethical, head of his firm and sough after for larger cases) told me that the practice of law was fundamentally about getting people to do what you want.  Getting into elective office depends upon getting the people to vote for you.  What was the first workind profession of the largest identificable profession of people in Congress?  

And then there are the people educated in economics.  We haven't heard much public comment lately from Robert C. Merton.  Here was a teaching professer whose mastery of economics and its associated mathmatics was sufficient to result, eventually in an award of a Nobel Prize.  But for all of his beautiful math facility, he didn't understand that just because statistics work perfectly with inanimate objects, man is an emotional pack (or herd)amimal.  Hopefully, after the LTCM fiasco, he is  modifying his models and teaching to consider the risk and potential instability of derivatives in the larger picture if international economics.

By the way, what was Ron Paul's profession?

 

 

 

 

Tue, 03/23/2010 - 13:43 | 273393 AnAnonymous
AnAnonymous's picture

It is still abundancy times: today we can expect to extract from the Earth more resources to support a human society than yesterday and tomorrow, more than today. With a steady productivity rate, this defines abundancy and leads to prosperity.

Yet it appears that many people felt the turning point is near, when one has to substitute more by less.

A bit of a reminder on the game.

Some areas harbour more population than resources to support and other areas more resources than population to support. The game is to transfer resources from the second kind of areas to the first kind of areas.

Debt and the possibility to go deeper into debt is a powerful catalysor to the transfer.

Seeing the issue through the currency scope is deceiving. Money is not a variable in the issue. No matter what, when the turning point is reached, tightening the money supply will not prevent inflation. No money/currency will retain its value in this context. Every currency will lose value as they are going to be less and less goods to buy with.

Countries do not choose to participate to the game. They must. And to sit down to the poker table, players must acquire chips. Chips are provided by a player, the US and are USD.When playing, countries are not interested in getting a currency that would retain value (it is not possible in the incoming time frame), they are interested in a currency that enables the fastest transfer of resources possible from the exterior to their area. This is what countries buy when they buy USD. There is no bluff to call here because it is not bluff.

The only limit to the current US scheme is the actual response for resources. One day, the US will emit a new credit line, flushes it around the world and collect less. And the next round even less. Not because of the USD itself. Because resources supplying countries will be short on the resources to sell. One day, Ghana will have no longer gold to sell. The US shall emit any amount of new credits, this wont change. Once Ghana is out of gold, the area is depleted and removed from the game.

Tue, 03/23/2010 - 09:11 | 273099 IBelieveInMagic
IBelieveInMagic's picture

The real losers are the commodity rich countries who are trading real commodity for green paper. Both US and China gain from the current global trading arrangement -- China is willing to let their US reserves grow fully well knowing that it may lose value in the future, as it is able to create jobs for their masses (and acquire technology and upgrade their people skills in the process) and at the same time they are importing the raw material for conversion. So, they are not really giving up their own natural resources.

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