Although the United States is still the world's #1 economy, it's increasingly
feeling the heat of the Chinese dragon, breathing down its neck. At the beginning
of the twenty-first century, the US-economy was eight-times larger than China's
- a decade later the figure was down to three-times. China's $5-trillion economy
has eclipsed Japan, Germany, France and Britain, to become the second-biggest,
after three decades of blistering growth, and is now within reach of overtaking
the US within 10-years. With China's economic growth rate at 10% and the US-economy
struggling at +1.5% growth, - this long-term prediction doesn't sound that
far-fetched.
China, with 10-times Japan's population, has long been expected to catch up
with its neighbor. But the global crisis and Japan's sluggish growth brought
that point forward by many years. China has emerged to become the world's largest
exporter, overtaking Germany, which held the title since 2002. Factories employing
low-paid workers to assemble iPods, computers, shoes, and toys are leading
the boom. China has also passed the US as the world's largest auto market and
producer. Two decades ago, a car industry barely existed in China.
In the midst of the global banking crisis, stimulus-driven Chinese growth
helped to propel the world's economy out of recession. Chinese demand for raw
materials and other imports buoyed economies from Australia to Brazil to South
Korea. China uses more than half the world's iron ore and more than 40% of
its steel, aluminum, and coal, lifting commodity prices. China is the biggest
player in the copper market, buying 35% of the global supply, and is the second
biggest importer of crude oil. State-owned Chinese companies are pouring billions
of dollars into base metal mines and oil fields from Canada to Latin America
to Iraq.
A free trade agreement between China and South East Asian nations came into
effect on January 1st, creating the world's third-largest free trade bloc.
The combined population of the trade bloc is 1.9-billion people with a combined
GDP of $6-trillion. Already, the ASEAN countries are providing the raw materials
and manufacturing parts for assembly hubs operating in China. About 60% of
China-ASEAN made goods end up in European, Japanese, and US consumer markets.
China is at the epicenter of the fast growing Asian sphere, with satellites
such as South Korea, Hong Kong, Taiwan, India, and Australia, hitching a ride
to the Chinese juggernaut. The shift of economic gravity to China didn't happen
by chance. Beijing's massive intervention transformed its economy into the
world's locomotive. The state-run mouthpiece, the People's Daily newspaper
has hailed China's economic superiority over Western-style capitalism, boasting
about its authoritarian rulers' ability to make quick decisions and their will
to carry them out.
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Washington is becoming increasingly alarmed at the rapid rise of China's economic
might, and also worries that Beijing might eventually challenge the US for
military superiority in the decades ahead. US Congressional lawmakers have
long cited Beijing's policy of undervaluing its currency, - the yuan, to give
its exporters an unfair advantage in world markets, and making China a more
affordable place to attract foreign direct investment in new manufacturing
plants. In July and August, the US ran a combined trade deficit of about $52-billion
with China, with the massive imbalance highlighting the hollowing out of America's
industrial base.
After holding the yuan steady against the US-dollar through the financial
crisis, Beijing signaled on July 19th, that it would begin to allow for the
yuan to drift higher, but at a gradual pace. Since then, the yuan has gained
about +2.2%, - far short of what US lawmakers want. US Treasury chief Timothy
Geithner told Congress on Sept 16th, "the pace of appreciation has been too
slow and the extent of the yuan's appreciation too limited. We are examining
the important question of what mix of tools, those available to the United
States and multilateral approaches, might help encourage the Chinese authorities
to move more quickly," he warned. IMF economists estimate the yuan is 5-27%
undervalued.
As the US-economy continues to stagnate, lifting the all inclusive U-6 jobless
rate to 17.1% of the workforce, the Obama administration and Congress are starting
to wage an increasingly hostile war against China, demanding that Beijing allow
the yuan to rise significantly, and at a faster rate. The US House of Representatives
passed a bill on Sept 29th, with huge support of 348-79, that treats China's
exchange rate as an unfair subsidy, and allows US companies to request a countervailing
tariff to offset China's price advantage. Such legislation, if passed by the
Senate, and signed by the President could ignite a full fledged protectionist
trade war.
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The US-Treasury and the Federal Reserve ("Plunge Protection Team") are seeking
to corral central bankers and finance ministers from other G-20 nations, to
join Obama's campaign to strong-arm Beijing into raising the value of the yuan
more quickly. The US-Treasury is preparing an all-out "currency war," which
has already started to inflate commodity and stock market bubbles, by instructing
the Federal Reserve to send signals about a resumption of "quantitative easing" (QE-2)
or the printing of dollars to purchase US Treasuries notes, in the months ahead.
The Fed is expected to pump vast quantities of freshly printed dollars into
the money markets, in a bid to lower long-term Treasury yields lower. The markets
have already discounted the probability of at least $500-billion of QE-2 injections.
On the surface, the Fed's propaganda artists say they aim to prevent a deflationary
collapse and stave off a "double-dip" recession. However, clandestinely, the
Fed is monetizing the federal government's debt, and is prepared to buy the
Treasury notes that Beijing decides to dump, should a full scale Chinese-US
trade war erupt.
Discounting the probability of QE-2, the US-Treasury's bond yield advantage
over comparable Japanese bonds, has narrowed sharply, thus weakening the US-dollar
to a 15-year low of 81.75-yen. Tokyo has tried to offset the Fed's QE-2 gambit,
saying it plans to launch its own version of QE-3, - a 5-trillion yen ($60-bil)
scheme, designed to purchase Japanese government bonds (JGB's) and other securities.
On September 15th, Tokyo acted unilaterally, dumping some 2.1-trillion yen
into the foreign currency market, for the first time in six-years, and purchasing
of $25-biilion, while trying to defend the US-dollar at 83-yen. However, two-weeks
later, the impact of the BoJ's "shock and awe," intervention scheme had worn-off,
with the US-dollar sinking to new lows. Japan's counterattacks have failed
to reverse the US-dollar's slide against the yen, because the size of the Fed's
QE-2 printing spree is expected to be at least ten-times greater magnitude
than Tokyo's QE-3.
And because Beijing essentially pegs the yuan to the US-dollar, Japan's exporters
are getting slapped with a double whammy, a rising yen versus the US-dollar,
and a rising yen versus the Chinese yuan. Since early May, the yen has risen
+10% to around 8.2-yuan, making Japanese goods more expensive in China, and
also in neighboring Hong Kong, where the central bank pegs the US$ at around
HK$7.78.
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Tokyo's financial warlords are very worried about the yen's strength, since
the growth rate of Japan's exports have already slowed by two-thirds, from
+45% at the start of this year, to +15% in August. Japan's exports are also
becoming less competitive than those from Asian tiger - Taiwan, where the central
bank enforces a "dirty float," by restricting the US-dollar to a narrow 10%
trading band versus the Taiwan dollar. If left unchecked, the yen's upward
spiral against rigged Asian currencies, and the US$, could push Japan's export
growth into negative territory by next year.
Taiwan's exports account for roughly 70% of its economic output, and trade
data for September showed the growth rate for its exports slowing to +17.5%,
down from +26.6% in August. A slowdown in the growth of shipments to the Chinese
mainland, where many goods are processed and re-exported, fell from +18.1%
in August to +11% in September. All of this suggests Taiwan's authorities will
not back down from its efforts to slow the US-dollar's fall, against the Taiwan
dollar.
Taiwan's foreign currency reserves jumped $8.4-billion in September, a monthly
record, and by about $21-billion in the past 3-½-months. In the first
10-days of October, the Taiwanese central bank bought US$3-billion to prevent
it from falling below its red-line in the sand at 30.5-Taiwan dollars, the
bottom of a decade long trading range. Through its stealth intervention over
the past few years, Taiwan has amassed a huge stash of $380-billion in foreign
currency reserves. Yet shockingly, only 4.3% of Taiwan's FX stash is invested
in the king of currencies - Gold.
The US Treasury and the Obama team have allowed currency intervention culprits,
such as Hong Kong's Monetary Authority (HKMA) and Taiwan, to slip under the
radar, and instead, have chosen to focus more exclusively on Beijing's rigging
of the yuan. However, the smaller Asian culprits might be next in-line. In
any event, Washington is trying to gain the firm backing of the world's second
most powerful trading bloc, the Euro-zone, which is also the biggest buyer
of Chinese exports, in order to prod Beijing to allow the yuan to rise more
rapidly.
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In some ways, the Greek debt crisis was a blessing in disguise for the Euro-zone's
economy. The Euro's slide to a four-year low of $1.200, and a nine-year low
against the Japanese yen, helped to boost new orders for industrial goods made
in the Euro-zone to +23% higher in May than a year earlier. Germany in particular
thrived on a weaker Euro, with surging exports and growth in consumer spending,
powering the German economy to a record expansion in the second quarter. German
exports were bolstered by demand from China and other emerging economies.
The Euro was plunging in a downward spiral in late April and early May, amid
fears that the European Central Bank would unleash its own version of QE, by
purchasing large quantities of Greek, Irish, and Portuguese bonds that Euro-zone
banks were desperately looking to unload. So far however, the ECB has limited
its purchases of distressed sovereign bonds to 60-billion Euros, and these
purchases were largely sterilized, thus helping the Euro to rebound to $1.400
last week.
Also helping the Euro to rebound sharply versus the US$, was the frequent
drumbeat of implied threats by the Fed to unleash QE-2, and public calls of
support for the Euro by China's premier Wen Jiaboa. "I have repeatedly expressed
China's support for a stable Euro and said that we will not reduce the amount
of European bonds that we hold. We have stood by the EU's efforts to overcome
its difficulties and achieve recovery," Wen said on Oct 3rd, seeking to curry
favor with Euro-zone politicians. Wen also promised that Beijing would buy
Greek bonds next year.
However, because Beijing pegs the yuan to the US-dollar, the Euro has climbed
about 10% against the Chinese yuan over the past four months, and partly as
a result, new orders for Euro-zone industrial goods quickly tapered-off. New
orders for industrial goods fell -2.4% in July, slumping to a +11.2% year-on-year
rise. Orders for capital goods, which are used in investment, fell -5.1% on
the month and demand for durable consumer goods dropped -3.2-percent. Euro-zone
exports were +18% higher in July than in the same period of 2009, and while
still impressive, were down sharply from June's annual growth rate of +27-percent.
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A further rise in the Euro's value against the Chinese yuan and the US-dollar
could further undermine global demand for the Euro-zone's industrial exports,
which prompted the Euro-zone's finance chief Jean-Claude Juncker to warn on
October 8th, "The Euro is too strong today," as it crossed $1.400, and just
a few hours ahead of a meeting of finance ministers and central bankers of
the G-7 clique. "I don't think the US-dollar is in line with underlying fundamentals," Juncker
said.
At a meeting with Chinese Prime Minister Wen Jiabao, ECB chief Jean "Tricky" Trichet,
Jean-Claude Juncker, and the EU's Monetary Affairs chief Olli Rehn, called
for "a significant and broad-based appreciation" of the Chinese yuan, to at
least match the Euro's rebound against the US-dollar. Yet at the same time,
the Euro-zone leaders praised China's commitment to purchase debt issued by
troubled Greece, a measure that would boost the Euro vs the yuan.
Behind the scenes, the Fed engineered the Euro's recovery by submerging the
yield on the US-Treasury's 5-year note below Germany's 5-year bund yields.
So far, the ECB has refused to intervene to halt the Euro's rally. The ECB
is skeptical in principle of interventions, - buying and selling currencies
to affect exchange rates. However, if the Fed signals a larger than expected
blast of QE-2 in November, the Euro could climb higher, and complaints from
Euro-zone industrialists would follow. At that point, the ECB might cast aside
its principles, and begin printing Euros and start buying bonds denominated
in foreign currencies.
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QE-2 fuels Commodities Rally, Since July 21st, Fed chief Ben "Bubbles" Bernanke
has floated trial balloons about the unveiling of QE-2, and engineered a sharp
fall in the US-dollar against the Euro, Japanese yen, Swiss franc, and emerging
currencies. The weaker dollar has fueled "hot money" flows into emerging stock
markets, lifted gold to record heights at $1,365 /oz, fueled silver's parabolic
rally to 30-year highs, and global commodity indexes have climbed to two year
highs.
On Sept 21st, the Fed made it clear that given the US-labor markets' weakness,
it's determined to prevent a deflationary spiral. That's a widespread drop
in wages, prices of goods and services, stock portfolios, and the value of
homes. Under a cloak of deceit and deception, the Fed is reviving the animal
spirits among speculators, and whetting the appetite for risk taking, by driving
interest rates to historic lows and crushing the value of the US-dollar. The
Fed's gambit is succeeding! Traders are now bidding-up commodities, shares
of commodity producers, and precious metals, before the next tidal wave of
QE-2 floods world money markets.
Soybeans jumped to $11.78 /bushel in Chicago, up +7% this month. Corn prices
saw their biggest two-day rise since 1973, up 12.7% to $5.75 /bushel, as expectations
of a drastic shortfall in crop production raised fears of a repeat of the global
food crisis of 2007-2008. Already there's talk of the necessity rationing corn
next year. Coffee and cotton have surged to their highest levels in 15-years,
and in Shanghai, rubber futures rallied by their daily limit to their highest
in four-years.
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London copper rallied to around $8,400 /ton, its highest since July 2008,
and aluminum extended a rally to touch $2,438,/ton. Shanghai zinc soared 5%
to its upside limit of 18,875 yuan /ton, and US light crude oil topped $83
/barrel, as the US-dollar weakened against the Euro. So while Americans are
losing their jobs and their homes, the Fed is making matters worse, by inflating
the cost of the basic staples of life. Another key driver behind the resurgence
of the "Commodity Super Cycle" is the slide in the US Treasury's 2-year yield
to historic lows of 0.35% this week, essentially ruling out any hike in the
fed funds rate until 2012.
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Food and energy account for about half of the budgetary outlays for the population
in China and India that live on less than $2 /day. Thus, the central banks
in the world's top-2 fastest growing economies are more willing to tighten
monetary policy in order to combat inflationary pressures from higher commodity
prices. According to Beijing's apparatchiks, China's consumer price index (CPI)
was creeping +3.4% higher in August from a year ago. But China's CPI could
be galloping ahead at a +5% clip or more, if global commodity markets continue
to soar.
On October 11th, the People's Bank of China (PBoC) tried trying to deflate
a powerful bubble in global commodity prices, and asset price inflation, by
mopping-up excess yuan in the Shanghai money markets. The PBoC hiked reserve
requirements for China's six largest banks, by a half-point to 17.5%, tying
the highest level in history. Earlier this year, in January, global commodity
and stock markets fell sharply after China surprised the traders by hiking
reserve requirements a half-point to 16-percent. But on this latest occasion,
traders simply yawned.
This time around, the PBoC's tightening moves have been neutralized by the
Fed's plan to unleash $500-billion or more of QE-2. The Fed and the US Treasury
are threatening to take the inflationary effects of super-easy money to the
extreme limit, even though QE-2 won't bring down the US-jobless rate. Instead,
the impact of QE-2 could be felt more acutely in China and India with sharply
higher commodity prices, and perhaps, followed by tighter monetary policies.
At some point, Beijing might see the logic of allowing the yuan to rise faster
against the dollar, utilized as a tool to help keep the imported price of commodities
under control.
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In both Japan and the United States, short-term interest rates are so close
to zero-percent that their central banks have resorted to nuclear QE in a bid
to drive down long-term bond yields. But these radical measures have failed
to boost economic growth. With fiscal stimulus packages being pared down, in
order to rein-in bloated budget deficits, and zero-percent interest rates failing
to produce jobs, politicians are seeking to expand exports, by reducing the
value of their currencies, as the sole remaining measure available to provide
an economic boost.
Warning of the danger of currency wars, IMF Managing Director Dominique Strauss-Kahn
told finance chiefs of theG-7 industrial powers and the emerging economies
of Asia and Latin America, "There is clearly the idea beginning to circulate
that currencies can be used as a policy weapon. Translated into action, such
an idea would represent a very serious risk to the global recovery." Yet the
global currency system itself, and the entire network of economic relations
built upon foreign trade, - is already breaking down under the weight of QE-
in England, Japan, and the US, and the daily rigging of currencies in the emerging
world.
Through stealth intervention in the foreign exchange market, Japan's central
bank has accumulated the world's second largest stash of FX reserves, reaching
$1.1-trilion in September. The size of Japan's FX has also swelled reflecting
the inflated value of its holdings of European and US-Treasury bonds. Last
moth, the BoJ held 765-tons of gold in its vaults, equal to only 2.7% of its
FX reserves. Gold dealers have long recognized that at some point, Tokyo would
eventually end its folly of accumulating paper currencies, and instead, would
see the logic of switching more of its bloated FX stash into hard assets, such
as gold or silver.
In an interesting move last week, Japan's ruling Democratic Party proposed
taking advantage of a strong yen to invest part of Japan's $1.1-trillion stash
into securing natural resources in overseas markets, thus raising the stakes
in a global battle with Beijing for strategic assets. Thus, the global "currency
wars," revolving around the Chinese yuan, can resurrect the "Commodity Super
Cycle," and establish Gold as the key medium of exchange that can guarantee
banks' promises to pay depositors, promises to redeem note holders, or to secure
faith in a currency.
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