Hard Core Financial Preparedness—Part III

by Kellene The Red Dragon of Debt

A Few Good Men "You Can't Handle The Truth" photo c/o www.eucatastrophe.com

As I write today’s article, I keep hearing this familiar voice in the back of my mind. It’s the voice of Jack Nicholson as his character yells indignantly to Tom Cruise’s character in “A Few Good Men.” With blood vessels bulging around his neck and his face turning red, Nicholson's character convincing hollers “You can’t handle the truth!” to those present in the courtroom setting. This character delivers this line with the utmost of belief that the general population of our nation simply cannot or do not care to understand what goes on around them in spite of the fact that it critically affects their everyday living.

Today’s segment in this Financial Preparedness Series is written in defiance of the sentiments of mainstream manipulation who erroneously believe that citizens can’t handle the truth. It is my hope that you will absorb this information sufficiently so that you may be spurned to research, ponder, and realize the validity of this information for your own benefit and independence. In contrast to this memorable line of script, I believe that YES, you CAN handle the truth. So here it goes. Yesterday I wrote an article talking about a fictional country known as Uberland. In order to teach you a clear precept without the cloud of preconceived notions, I made the country fictitious. However, today we’re going to dig in to the reality of the world market with pure and simple facts. At present, the Chinese government holds approximately $2.13+ trillion dollars of U.S. debt. This is in the form of actual debt, currency, bonds, etc. This does not include the physical investments that China holds here in the U.S. such as real estate and business interests. In fact, China is at present the largest holder of foreign exchange reserves collectively and as of March 16 of this year is the largest owner of U.S. Treasuries.  Japan and China have frequently traded first and second places in this regard over the last two years. (CRS Report RL32165, China’s Currency: Economic Issues and Options for U.S. Trade Policy, by Wayne M. Morrison and Marc Labonte.)

Will U.S. Bonds continue to be of worth? photo c/o blog.kir.com

U.S. Treasury securities is what our nation presently uses to primarily finance our debt. Keep in mind that our present debt is running over $12 trillion dollars.  In order to finance this debt, the U.S. needs to sell a LOT of U.S. treasuries and other assets to foreign investors. (I’ve recently read several reports that claim that the U.S. is more than 80% behind its goal for U.S. Treasury sales for this time of the year—but that’s another story.) Keep in mind that the good aspect to the U.S. in selling their debt to China, vs. other nations, is that China is notorious for holding onto the debt long-term. This means that the U.S. get’s to postpone its day of reckoning when they have to make good on buying back the bonds and other like assets and paying a highly compounded interest rate.  With China purchasing our U.S. currency and just keeping it in store, it also helps the U.S. to essentially hide the impact of the large volume of U.S. dollars that are in circulation, because such a significant amount is just sitting in China doing nothing. We have utilized the Chinese relationship for so long, that they now hold 24% of all of our foreign debt. Does that make them our best friend or a formidable vulnerability?  You decide with the content of this bit of information. Fortunately, our relationship with China does posses some minor checks and balances. The U.S. is the largest purchaser of Chinese exports.  This is in part why China has invested in the U.S. so heavily. But when you really think about it, having China sustain us so heavily financially just so that we can have the financial strength to keep purchasing their exports is kind of like buying your own birthday present. The real danger in China having invested so heavily in us, and vice versa, is that if there is any curve ball, we’re in deep trouble.  What kind of curve balls? The kind that come from Mother Nature or just plain consequences of physics. You can’t fight them. You can’t hide them. And they do have to be reckoned with. Suppose China suddenly experiences remorse in owning so much U.S. currency.  If they were to sell off such assets, they would flood our market with our own currency thus rendering the currency we presently have in the market as useless in two ways. The first way would be that they would deplete us of our supply of “stuff.”  If China dumps their currency back into our market, they will do so on an exchange. In other words, they will give us the U.S. dollars in exchange for something else. That something else could be their own currency, gold, or like assets.  Having to make good on this debt we have with China will inevitably deplete our resources of “stuff.”  Remember what I shared with you yesterday regarding what happens when you don't have enough “stuff” to back up your currency?  So China will have “stuff” but we will simply be left with pieces of paper that are supposed to represent the “stuff” that backs them.  And yet we will have dramatically depleted our “stuffs” in order to make good on our debt to China.  Got it?

What will our currency be worth? photo c/o www.acus.org

The second consequence to China dumping our currency back into our market is that it would inherently deplete our present currency value.  Let’s estimate that we presently have about 800-900 billion U.S. dollars in circulation in our nation.  If China dumps their hundreds of billions of U.S. currency back into our market, then the value of our presently circulated currency goes way down—it’s call supply and demand.  It’s very much like what’s happening in Florida right now with strawberry farmers simply destroying their crops instead of harvesting them to market.  They normally get about $1.00 per pound of strawberries, however, since there are so many strawberries being brought to market right now, the going rate is only 25 cents per pound.  So instead of harvesting them, the famers are simply destroying the strawberries in order to better influence the market of supply and demand. Supply and demand is just as important when it comes to our supply of U.S. currency as it is to our “stuff.”  If money literally grew on tress in ever possible climate, then it wouldn’t have any worth. So if we get nearly double the influx of U.S. currency into our market all of the sudden, then it will have the same effect on it’s value. Let’s keep in mind that our nation does not have “the stuffs” to back up our currency like we used to.  Remember, we have exhausted all of our wheat surplus.  We no longer have any such surplus under control of the U.S. Government.  We have also exhausted all of our gold reserves that we were supposed have universally backing our currency.  Yup. There’s literally no gold sitting in Ft. Knox for the benefit of backing our currency. To make matters worse (and I’ve shared this with you countless times before) we no longer are provided with an accounting by the Federal Reserve of exactly how much currency is in circulation at present. (aka the M-3 Report) The $800-$900 billion is simply an estimate from many economists. But what if we are WAY off on that number since it’s being held in such secrecy?  A better question is why would this number NEED to be held as secret if it wasn’t bad news?

Whose the kingpin now? photo c/o comicsnexus.com/

Here’s the final way that China’s holdings could harm us significantly.  They are presently the kingpin, so to speak. In other words, if China starts dumping their U.S. dollars, then other nations such as Japan, Russia, Taiwan and India (which are the top 5 holders of U.S. debt) will start dumping theirs as well. The consequences will immediately dilapidate our financial value as a nation. So, is it likely that China starts dumping a lot of their debt?  Well, they certainly are getting nervous.  Over a year ago the Chinese Premier seriously questioned the stability of our market and insisted that the U.S. go to extreme measures to show China that their investments in our debt were worthwhile. They have done so repeatedly just in the last month as well—blatantly expressing serious concerns in holding U.S. debt/assets.  Part of the reasons for this is yet another layer of the problem. The agencies which actually rate the security of any known debt are no longer trustworthy to do so. Moody’s and Standard & Poor’s are two agencies that are required (and supposedly expertly reliable) to rate a debt/asset.  They rate them usually anywhere from a “triple B” to a “triple A.”  Well, they’ve lost a lot of their trust in doing so in the nation because THEY were the ones rating the horrible sub-prime mortgage packages as “triple A”, the highest rating available. As a result, China and other nations were purchasing these dangerous debt packages and left holding the bag when the bottom fell out.  So China and other nations are dubious in accepting any rating that these two agencies provide.  It’s the equivalent of you getting a full-ride scholarship to a college based on your grades, only to discover that you never even attended class and that you had simply bribed all of your teachers to put an A grade on your report card. Oh, and did I mention that all companies who want a rating have to PAY Moody’s and S&P to rate them? Conflict of interest, perhaps? So, what could possibly happen that would cause China to suddenly start dumping their U.S. assets?  What would be so vital that they would HAVE to disrupt their relationships with the U.S. by doing so?  Well, folks. That’s what we’re going to cover tomorrow. Hard Core Financial Preparedness Part I Hard Core Financial Preparedness Part II Hard Core Financial Preparedness Part IV

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Comments

I agree with you. Sun-Tzu is treated as almost a deity in China. His book The Art of War states that the greatest general wins the war without fighting a battle. Funny the book The Art of War is about 65 pages long, but it will give you a look on the thinking of China Power elite.

Kellene-
I'm trying to wrap my mind around this issue. Please tell me if I've got it wrong:
1. We consumers buy lots of things from China with our American dollars.
2. China has all these US dollars to do something with.
3. The most stable place for them to put those US dollars (until recently) was in American bonds, etc.
4. So, China has lots of paper which they bought with US dollars.
If China doesn't buy American bonds, etc because our economy is becoming destabilized, what will they do with these dollars that we send them when we buy their things? If US dollars are becoming suspect internationally, then they can't buy anything with those US dollars unless they offer to pay more (and more and more) for what they want. OK, so then the US dollar value declines internationally.
All clear, so far.
But how does China get their surplus US dollars into the US money supply and thus cause the devaluation of the dollar within our borders?
They are in a dilemma, are they not? If they demand we redeem the paper they've got, we'll just print mega-quantities of dollars and pay them off. This they would not like to happen, so they may just unload US paper in piddly amounts so as to not devalue the dollar. Phew!
So, at the moment, debt owed to China and Japan, etc are not the imminent problem. The imminent problem is the Fed printing money as some kind of solution to overcome deflation or inflation (obviously, they don't know which--and neither do I!).
While these storms rage above us, it seems the best course is to either buy needed goods and services and deplete soon-to-be-worthless savings, and/or invest in commodities (gold, silver, bullets, toilet paper, etc) which will maintain relative value and can be traded.
Sigh.

Preparedness Pro's picture

China doesn't buy our bonds with U.S. dollars. U.S currency is simply another form of investment for them. They can literally dump their U.S. dollars back into our market in exchange for whatever they want that is of equal value. That could be gold, yuan, euros, or whatever they choose. It's simply part of the deal. We can't simply print up more money to buy back the currency. And much of their debt that they hold has a similiar negotiation as well.

If China sells off their stock of our currency to another foreign investor at a discount, that would be even worse because the discounted sale would publicly devalue our currency. At least if the U.S. is the one to buy it back, then the U.S. has control of the publicity, and how much of that currency may be recirculated or destroyed.

So China has a lot of our debt, and a lot of our cash/currency as well. Dumping either into the international market would be a tough pill to swallow for us. Dumping both would be catastrophic.

Kellene--Thanks for the concise articles. I have an understanding of the financial concepts you are taking about, but you have made everything so very understanable. You have put words to my thoughts. China has always had the goal of defeating the U.S. They haven't made a secret of the fact. Now it looks like they are very close to taking over the U.S. and they didn't have to fire a shot! China is not our friend,never has been and never will be. I am wondering if we shouldn't learn to speak Chinese.

Very well explained Kellene - thanks. It's an ominous scenario that I think about often.

自由或死亡!

Can’t pronounce it, but I can hand it to them on a card if they ever try to lay claim to our country…

You have stated "We have also exhausted all of our gold reserves that we were supposed have universally backing our currency. Yup. There’s literally no gold sitting in Ft. Knox for the benefit of backing our currency." I know that we are no longer on the gold standard and our dollars are a fiat currency. Nixon closed this window for good. But, do you really believe there is no gold in Ft. Knox? How was this suppy "exhausted"? Where can one go to study and research this?

Thanks,
Bruce

Preparedness Pro's picture

You can start by reading all of the research in "The Creature from Jekyll Island" by G. Edward Griffin. YOu can also find a great deal of info by googling "gold + fort knox + gold standard"

Did you simply postpone the follow up to this article - Part iv - or did I miss something? I have been waiting on the edge of my chair for the next article, after all, your final words were "That’s what we’re going to cover tomorrow." I'm just curious, is all.

Thanks for all you do - I not only absorb all that you write, but so do many of my friends and relatives that I turned onto your web site - keep up the good work!

Preparedness Pro's picture

Glad to know that you noticed the missing piece, Ifokus. There was simply a communication glitch between myself and my staff. It got programmed for Monday instead of Thursday like it was supposed to. Nonetheless, you'll have it. :-)

Another great book showing what a lot of people think is going to be a historical parallel for the U.S. economy--post-World War I Weimar Germany--is Adam Fergusson's great book "WHEN MONEY DIES". Mises.org has the entire book posted online:

http://mises.org/resources/4016

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