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.