The financial community has been making a huge deal of the fact that foreigners are no longer buying Treasuries. In particular, the fact that Russia and China have lowered their exposure here is seen as a sure sign that the US Dollar is doomed.
This analysis is somewhat naïve.
For starters, both China and Russia have substantial exposure to Europe from an economics standpoint. The EU taken as a whole is both China and Russia’s single largest trade partners. So both countries have been diverting investments and funds to the EU as they attempt to prop it up.
Secondly, I want to dispel the notion that China and Russia are the economic powerhouses everyone believes them to be. I will be addressing this further in later articles but for now I simply wish to contend the idea that China and Russia are economic powerhouses capable of dumping the US Dollar for trade purposes.
Instead, both Russia and China should be viewed as what they are: totalitarian regimes that are barely maintaining control over their respective populations. These are not free, vibrant economies based on small business growth and Democratic Capitalism; they are Centrally controlled economies in which a tremendous amount of the economy and wealth is concentrated in the hands of a very select few.
I realize this flies in the face of what 99% of analysts claim. I also realize that the US itself has begun to resemble such economies in some regards. However, the fact remains that the US, while engaging in similar economic policies and witnessing a similar concentration of wealth, remains ultimately a free and open economy in which small business growth and success are possible.
Moreover, I believe that the US will differ dramatically from both China and Russia in terms of how it recovers from the coming global contraction. Even a cursory review of US history shows that this country has been in a continual state of collapse and renewal since its inception. The reason for this is the flexibility of the US government structure and the US’s basis in capitalism.
I’m sure this might come as a shock to many as I am often thought to be “doom and gloom,” based on the fact that I foresee a large-scale Crisis and economic contraction coming in the future. However, I believe the US will recover more quickly from this Crisis that either China or Russia due to the fact that the US’s economic is unbelievably dynamic, based on innovation and entrepreneurialism.
In contrast, the wealth and capital accumulated in China and Russia have largely been the result of back-room deals in which a small minority were granted access to formerly state-controlled assets and entities at bargain basement prizes in return for political alliance with the controlling parties. Very few businesses in these countries started out as small entrepreneurial efforts that then grew into empires.
Having said that, I do not believe that China or Russia are in any position to dump the US dollar, at least not in the near-term. The US Dollar may one day no longer be the reserve currency of the world. But that day is years and possibly decades out. But the notion that China or Russia could just dump the Dollar and move around the US in terms of trade is unbelievably naïve and greatly underestimates the importance of the US to the global economy.
In this context, I do not believe China and Russia’s recent dumping of Treasuries to indicate that these countries are moving away from the US. Rather I view them as both countries diverting cash away from the US and into Europe in an attempt to prop the EU up.
I also view these moves to indicate that both China and Russia are in fact facing problems at home that require their attention. Reports out of both countries show political instability increasing amidst mass protests. Both countries will be diverting cash towards dealing with these issues through various stimulus schemes, bribes, bailouts, etc.
In short: I do not believe that China or Russia are in fact dumping Treasuries or the US Dollar because the US is doomed. Rather I believe these moves to indicate both countries are facing larger, more pressing issues that require their capital.
Those pressing issues are Europe, namely:
- According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans... the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.
- The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
- The European Central Bank's (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany's economy and roughly 1/3 the size of the ENTIRE EU's GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).
- Over a quarter of the ECB's balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)
So we're talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.
And all of this is occurring in a region of 17 different countries none of which have a great history of getting along... at a time when old political tensions are rapidly heating up.
On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.
So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.
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