Sunday, January 24, 2010

Why China Sells Bonds, US has no exit strategy

China has $2.4 trillion in reserves. It has so much cash that it does not know what to do with it! Why then, do they need to sell bonds (or debts)? Definitely not because they need more cash.

They are preparing the world for the coming decline of the USD. With the reckless inflationary policies of Washington, the world has been gearing itself up for the day when the USD is no longer the world reserve currency. For decades, trades around the world has been done in USD. This demand for USD has allowed the politicians in US to spend recklessly, thinking that it can go on forever, thinking that the model of consumption by the US and production by the rest of the world is sustainable. Now it's all coming to an end.

China is selling bonds to increase the liquidity of the Yuan. It is as obvious as that! The Chinese know that they are going to be the next economic superpower, eclipsing the US, and they are preparing the world for it!

The US commercial real estate looks set to burst next. When that happens, we can expect the politicians there to print even more money. This dose of money may prove to be fatal, the final straw for their dollar. Bernanke keeps saying that he has an exit strategy. He thinks that he can stimulate the economy and then exit. This will never be possible. Once the stimulus is removed, all the propped-up bubbles will collapse again. The best exit strategy is not to stimulate at all! All that he has done is to stimulate the collapse of the dollar.

The subprime crisis was caused by Greenspan and Bush. Interest rates were lowered to 1% back then. And budget deficit was around $200 billion if I recall correctly. With these, they created this monster of a subprime bubble, and the worst recession since the Great Depression. Fast forward to today, and we see interest rates at 0%, and budget deficit of more than $1 trillion!! Imagine the chaos that is to come. It's madness.

I have no sympathy for Bernanke and his Washington and Wall Street cronies at all. They have destroyed Americans' lives and the value of the Dollar. I would really love to see their faces when the next crisis hits.

Saturday, January 23, 2010

Does China need US demand? Why is China not letting its Yuan go up?

Here's a 2nd post in a day, a continuation of the previous post. Seems like there's a word limit on blogger posts.

The Chinese need not sell to the US. The issue is not with demand, but rather, supply. And the Chinese has no problem with supply. Demand need not be stimulated. Anyone will desire a big house, a big car, a plasma TV, good food, a private jet, and the likes! If the USD falls in value and they stop buying from the Chinese, the Chinese can now consume their own goods.

Why is China not letting its Yuan go up?

People say that China is doing this so that it will give their exporters an edge. A lower Yuan means that the Chinese goods are cheaper and more competitive in the global market. Also, the Chinese may need some time to develop their own domestic market, so that they will be less reliant on exports to the US. But maybe this is just half the story.

I guess maybe the Chinese are just buying time to get rid of their USD bonds, the $800billion in USD that they hold. If the Chinese let the Yuan appreciate now, it will mean that the USD drop a lot. It will mean that 1/3 of their reserves get wiped out. And it will mean the Chinese lose a lot of money. If you have been immunised to this sort of figure, here's something to put things into perspective: the US took 200 years to build up its monetary base to $800billion!

I think the Chinese knows that the USD only has one direction to go, and that is downwards. So the faster they sell away all their US debts, the faster they let their currency appreciate, the better it will be. But they are delaying this, maybe because of lack of political guts, or perhaps they are just buying some time for themselves first.

Principle of Conservation of Purchasing Power, US Consumption, US-China-Gold Dynamics

A lot of people argued that the US is the engine of growth for the world. They consume what the world produces, that is why we have so much prosperity. People will say that without the US consuming, the world will hit a great Depression. So the world has no choice but to keep on lending to the US, and then the US use that money to buy from the rest of the world.

Well yes, this scenario is somewhat true, but only decades ago. It is totally different now. Even if the USD falls today, even if their demand falls, it is not going to matter to investors who know where to put their money. Even if the world falls into a great Depression because the US can no longer buy all the world's stuff, it is not going to matter to these investors. Stocks may crash everywhere, markets may go down everywhere. But the one thing that will not get destroyed is this: purchasing power.  Purchasing power is like the Principle of Conservation of Energy in the laws of Physics. We should have the Principle of Conservation of Purchasing Power in Economics too (do we already have this? I'm not sure about this, but a quick search on Google returns no relevant results). Maybe people will understand things better that way.

Purchasing power will never get destroyed even if stock markets crash, or even if the world trade gets reduced by 30% or 50%. Purchasing power merely gets transferred from one place to another. Yes if the US falls, we all will be affected, including China. But the Chinese Yuan will have so much more purchasing power. Just simply by printing money and borrowing like crazy, the US is transferring its own purchasing power to other parts of the world. The other nations don't even have to do a thing! And imagine what the Chinese Yuan will be worth once their government lets it appreciate. The smart investors will invest in things that will increase their purchasing power. And one glaring obvious place to be in is China. 

From my rants in my previous post, we all know that the economic power of the world is migrating from the US into China. When the USD falls, US can no longer buy that much goods anymore. The Chinese will be able to enjoy the fruits of their labour. They will be able to consume the stuff that they produce, instead of having to ship them all to the gluttony of the US.

Well of course, when the US crashes, the whole world will be affected, including the ordinary Chinese people. There may be temporary hardship for the Chinese. But I think their government is smart, and they are developing their domestic market right now so that they won't be too reliant on exports to the US. Hopefully they will make it in time to lessen the adverse impact on their own market. For the rest of us, oh well, better put our money in places where the purchasing power will be magnified!

If China can trade all their $800billion of USD right now for gold, they will do it in a heartbeat. The problem is that this sum is too huge, and they will cause a lot of disturbance in the gold market. And another problem is that there are not enough people who want to buy the USD from them, and there are not enough people who want to sell gold to them.

There has been a lot of complains from the US that the Chinese are artificially suppressing the Yuan. What will happen if the Chinese actually appreciates the Yuan? The US will be doomed right now. The Chinese suppress the RMB by selling their RMB for USD. Selling more of RMB means the 'price' of RMB goes down. When China stops selling their RMB for USD, the 'price' of RMB rises, the 'price' of USD falls. So right now if the Chinese heeded the US' call for them to stop supressing the Yuan, the US will just be meeting its doom faster. Is this all just a theatrical act by the US? They 'need' the low Yuan to further perpetuate their bubble, not a high Yuan. Maybe they don't know what they are really talking about.

Wednesday, January 20, 2010

Dynamics of Treasury Bonds, ARMs, and the Federal Reserve

Bonds have face value of say: $1000. Investors bid for the bonds. The more investors there are bidding, the higher the bond price will go (high demand, higher cost). Eg. Say the winning bid is $990. So the yield is $10/$1000, or 1%. That's because at the maturity date, the government will pay you the face value of $1,000.

If there are less investors, the bond price will drop (low demand, lower cost). Eg. Say the winning bid is now $950. So the yield is $50/$1000= 5%.

Basically, high bond price = lower yield, and low bond price = higher yield.

Last year, the US issued $1.5 trillion in debt. 80% are funded by the Federal Reserves! This means that foreigners are not willing to buy the US bonds. This means that the Fed printed money and comes in to buy the bonds, artificially creating demand. So the bond price goes higher, and yield drops.

Now, a lot of things are pegged to bond yields. For eg. the Adjustable Rate Mortgages (ARMs). Low bond yields means lower interest payments on the ARMs - for now. But next time, when bond yields start to rise, the ARMs will follow suit. And then more and more defaults start to happen. I'm referring to the commercial real estate ARMs. You can see this in the graphs that I posted 2 posts before this.

So if the Fed buys the bonds, does this means that the US is owing money to itself, like Japan? Unfortunately, no. The US government owes money to the Fed. The Fed is not the US. The Fed is a private entity, whose purpose is to make profits, and with shareholders made up of an elite group of global bankers. Many of them are not even Americans.

So there you have it. The Fed keeping interest rates at ridiculously low levels. Instead of letting the free market set the natural rate, they come in and manipulate it.

Through their action, they can only delay the pain, the inevitable big collapse. And the more they delay it, the greater the pain will be later.

If you have a US bill right now, you don't have to panic or convert it to another currency. Just frame it up and hang it on your wall, and 10 years down the road, show the worthless bill to your kid. Then your kid will really come to understand the devastating effect of inflation.

Tuesday, January 12, 2010

The REAL numbers behind the headlines. Govt propaganda

I can't watch these videos on Firefox, but they work fine in IE.

For those who love lots of numbers and stats:

For more in-depth explanations:

Random Updates from a friend and Bloomberg: The Phillipines had hired specialists from Barclays and Deutsche Bank to sell off its $1.8 billion (If I remember correctly) US debt. It is a good move on their part. Although they have diminished return, if they had waited longer, those USD will be worth far less.

Well, there're too many news for me to post here. Nevertheless, these are news that are signs of the time. People are realizing that the USD is inherently flawed, and are moving away from it. For decades, the USD has been propped up by worldwide demand because world trade is done in USD. With this movement away from USD causing falling demand, coupled with wayward debts and deficits and printing, the USD can only go down down and down.

If you need good doses of news related to USD and gold, you can visit

Saturday, January 2, 2010

Mortgage Reset Tsunami

The recent crisis in 2007-2008 started when the subprime mortgage rate resets around 2007-2008, as you can see from this chart.

Borrowers initially had lower rates to deal with. However, as the rates increase, more and more people will not be able to repay their debt. The subprime mortgage crisis is just the beginning.

Refer to the chart, look at the other adjustable rate mortgages that are due to reset soon!!!!

The Option ARM, Alt-A and Prime mortgages have yet to reset. When this happens, it will result in higher mortgage payments for millions of Americans. Millions more foreclosures are coming.  

These are mortgages that are not necessarily subprime, but belongs to people who have good credit. The subprime crisis has already pushed the first group of people off the cliff, and the people with good credit are going to be the next victims.With declining home prices, people are going to find it impossible to refinance their debt.

The real estate crisis in America will last for years. The mortgage rates won't even peak until around 2011-2012 as shown by the chart. It is no wonder that people like George Soros recently remarked that the commercial real estate bubble is going to burst next, and he is looking to make some spectacular profits from this.

I cannot imagine what is going to happen. Not only does America need to grapple with these mortgage problems, it is also going to need to deal with a currency crisis.

UPDATE: Another graph here:

 Quotes from a financial times article:

"Sue Troll, credit analyst at T Rowe Price, who in 2006 forecast the subprime meltdown, describes Option ARM mortgages as “subprime on steroids with their underlying quality in many instances having been worse than subprime, despite involving higher quality borrowers”. She says approximately 80 per cent were low- or no-documentation.

Mr Tilson expects resetting Alt-A and Option ARM loans to push default rates even higher, further flooding the housing market, and putting further downward pressure on housing prices."


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