Why China Is Dumping The Dollar - And Why You Should Read Up on the Weimar Republic

CrownThomas's picture

As ZH posted today, China is systematically dumping the dollar (and beginning to set up other agreements). CNBC assures everyone, however, that things are fine. Don't read those anonymous financial blogs.

China has a long way to go in turning itself into more of a consumption based economy, so the dumping of USD has to be rather gradual (as to not rock the boat too much, the U.S. still needs to be supplied the funds to purchase Chinese goods, and also most trades are settled in USD for now), but it is happening.

One major reason for this action by China is due to the fact that the United States Government has loaded up on so much debt that it's not possibly sustainable - and the Federal Reserve knows that unless they want to see the house of cards the Keynesians have built come crashing down, they have no choice but to completely monetize the debt. As the dollar continues to be devalued (more in a second), the more yuan China has to print in order to buy dollars to keep their fx target. So not only is China on the hook to pay higher commodity prices (priced in dollars), they're stuck with creating more domestic inflation as well - which is something they don't have time to deal with at the moment, as their housing market is on the verge of collapsing.

Today ZH also pointed out that Greece has 107 Billion Euro in hidden liabilities that oops, they forgot to disclose to anyone. Which made me think, hey, how about the unfunded & if not hidden, largely swept under the rug liabilities the United States has.

Alas, the Treasury doesn't use GAAP accounting when they put out their debt figures, they use cash accounting. This means that all of the social programs we have in place (medicare, pensions, social security, etc) are left out of the debt calculation. China is not stupid, they realize that not only are we going to be 100% of GDP soon on our reported debt, we're going to be well over 100% of GDP on total debt if we are being honest & including our unfunded liabilities. Over $80 Trillion in debt, or over 500% of GDP, accordng to Shadow Stats John Williams.

Here is a chart showing our Gross Debt to GDP, along with Total Debt to GDP if we were being honest (via John Williams, Shadow Stats)

 

That's pretty isn't it? So what options does that leave the Federal Reserve if they want to continue the global ponzi? You guessed it, monetize the debt, all of it. And as the Fed buys over 100% of the net treasury offerings, the Dollar begins to lose even more purchasing power. This is what puts China in a tough spot, for reasons mentioned above.

And Yes, Monetize the Fed Will:

 

So, as you can see this is the house of cards we're dealing with right now. China is not being fooled, and they will inevitably leave the dollar behind at some point in the future. Which means less buyers for US Debt, which means more money printing by the fed, and dollar devaluation - you see where we're going here. As this cycle picks up steam, we can expect more inflation than we're already seeing (be it "core" calculated by the Government, or "real" calculated by Shadow Stats).

Here is a nice chart showing how happy we can be that the A. The Federal Reserve was put in place to facilitate this ponzi, and B. That we went off the Gold standard

 

Pretty soon we can start using money that looks like this -- I reserve the right to be the Battleship.

 

 

And finally, the Federal Reserve would like to let the Congress, and the American public know, that no matter what Zero Hedge says about them, they will "not monetize the debt"!