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

smartknowledgeu's picture

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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.

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:


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? 

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. 

dnarby's picture

(Waits patiently for Chumba and Gekko to chime in)

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.

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.


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?

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.

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:

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.

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.




hbjork1's picture


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?





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.

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.