Nations will rise against nations

March 15th, 2009

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A few days, as reported widely in the news media, Chinese Premier Wen Jiabao said at a press conference that

We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets.

To be honest, I am a little bit worried and I would like to … call on the United States to honour its word and remain a credible nation and ensure the safety of Chinese assets.

Those words, when translated into English in writing, sound bland. But if you watch what he said in full video in the original language, then you will be able to appreciate the immense gravity of the situation from the tone of his voice.

But dear readers, you must understand that Premier Wen was just stating the obvious. There’s nothing new in what he said. All you have to do is to turn back to what we wrote in December 2006 and read Will the US dollar collapse? and Awash with cash?what to do with it? to see the big picture of what’s going on for years. As we wrote back then,

Lately, we are again hearing that central bankers are murmuring about diversifying their foreign reserves away from the US dollar. Does it mean that there is an imminent liquidation of their US dollar reserves? Well, this is not the first time they murmured about it and it is definitely not in their (including the Federal Reserve?s) interest to see a collapse of the US dollar. The Chinese, with their US$1 trillion of reserves, would not want to see their stockpile of US dollars to lose significant value.

That paragraph was written in the final days of 2006. Today, China’s US dollar reserve had doubled from they had more than 2 years ago. The major difference between today and back then is the emergence of the Global Financial Crisis (GFC).

Thanks to the GFC, the status quo, which had been running for decades, is stressed towards a breaking point (but who knows, perhaps that inevitable  breaking point could still be delayed for longer before an almighty snap happens). There are far too many contradictory and conflicting interests among nations.

For the US, as we said before in How is the US going to repay its national debt?, is facing a situation in the coming decades of having to pay a colossal amount of public debt. The public sector is facing a massive debt many times its GDP from the unfunded Medicare and social security liabilities. With the GFC, the US government is transferring more and more private debt to the public sector through bailouts, handouts and stimulus. It is either the US mobilise its monetary printing press to massively inflate away (i.e. print copious amount of money) all these debts or they face up to the reality that they are bankrupt and go through the cold turkey of an almighty deflationary collapse (read: almighty depression). If the US chooses the former, China will be furious because that will be doing the very opposite of what Premier Wen called on the US to do, namely to “honour its word and remain a credible nation and ensure the safety of Chinese assets.”

Unfortunately, the big problem is that the US (along with countries like Australia and UK) has been de-industrialising and hollowing out its economy for a very long time, while the China has been doing the opposite. To put it simply, the US is consuming more and more while China produces more and more. This gross imbalance has been playing out for too long. With the GFC, the US consumers are effectively bankrupt and cannot borrow any more to buy from China. China has lost its biggest customer and is in trouble too.

The coming G20 Summit will be filled with countries with conflicting agendas. The US (and UK) wants more stimulus (and of course, bailouts when required), which can only happen if they print money (i.e. devalue the US dollar), which is as good as spitting on China’s face. Europe (headed by Germany and France) wants the focus to be on regulations and prevention, which means they are less keen on stimulus and bailouts. This is because the latter will involve the tax-payers of countries like Germany rescuing the tax-payers of other EU nations. China, on the other hand, wants an overhaul of the current world order so that they can have more power and say to better reflect their status as America’s creditor. Obviously, the US will not like that because that will mean they have to voluntarily descend for an ascending China.

There are plenty of temptations to take the easy way out. For example, if the Chinese expect the US to inflate away their debts by printing money and thereby, devaluing the US dollar, they will be likely to devalue their RMB in order to continue the process of hollowing out the US economy. The US (and the Europeans), in response, could impose trade barriers on Chinese imports. The Chinese could retaliate by dumping their holdings of US Treasuries. Remember, these are just examples of what may happen and they are by no means predictions. But we trust that you get the idea here.

Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise. We have no doubt that there will be plenty of Black Swans appearing in the days to come.

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  • Hey Ed, noticed since the first time China began saying they are worried, they’ve been buying Australian resources in big numbers? Not sure if I’m deluded or blind but pretty obvious to me that money is no longer fully allocated to US Thivn … I mean Treasury bonds. I’m going into oil now especially after the IEA report. If it’s not the implosion of Tbonds, it’ll be the supply crunch that will create mega-inflation.

  • Hey Ed, noticed since the first time China began saying they are worried, they’ve been buying Australian resources in big numbers? Not sure if I’m deluded or blind but pretty obvious to me that money is no longer fully allocated to US Thivn … I mean Treasury bonds. I’m going into oil now especially after the IEA report. If it’s not the implosion of Tbonds, it’ll be the supply crunch that will create mega-inflation.

  • Hi Steve!

    Yes, we notice that. All we have to put two and two together and that’s the most likely explanation. The only risk for China is for foreign governments to block its investments (e.g. Australia’s FIRB may block the Chinalco deal).

    Another risk for China is that down the track in many years time, foreign governments may decide to nationalise those Chinese assets. If that’s the case, a few Chinese aircraft carriers on the foreign country’s coast may do the trick.

    As for T bonds, there’s a risk shorting it- Why are nothing-yielding US Treasuries so popular?.

  • Hi Steve!

    Yes, we notice that. All we have to put two and two together and that’s the most likely explanation. The only risk for China is for foreign governments to block its investments (e.g. Australia’s FIRB may block the Chinalco deal).

    Another risk for China is that down the track in many years time, foreign governments may decide to nationalise those Chinese assets. If that’s the case, a few Chinese aircraft carriers on the foreign country’s coast may do the trick.

    As for T bonds, there’s a risk shorting it- Why are nothing-yielding US Treasuries so popular?.

  • Pat Donnelly

    Hi
    I read this site every week and am very in tune with what you say. Please keep up the good work!

    I have to take issue with this article however. PRC or PLA, is not concerned about US investments. They will buy as many as they are asked to as asked when asked, by USA. China will be consuming more and more internally, and stimulus such as western demand, adds very valuable margin. There has been a colossal transfer of technology to China by the west but above all by USA and they are very grateful. They are improving on this tech and will compete with Japan to show them how good they are. They are victims of inferiority attacks by Japan and USA having had to deal with centuries of English etc inferiority attacks. These drive China. Face, face, face!
    After the Aceh disaster, the General in charge of their PLA War college, threatened the USA with massive attacks if similar disasters befell western coastal cities in China. There was more bravado there as well. Their perception was an oil grab by US interests. They advised their allies in Burma to move their capital inland and up high from Rangoon, years ago.

    Ruling the waves means that Canute might well nowadays be able to command the waves to retreat!

    Lately there have been provocations at sea, needling attacks on a US cat, tracking subs out of Hainan.

    These publicity attacks are a reminder that they are partners. Just more diplomacy. Iran is another example of a mismatch between what is said publicly and what is a reality. Factions within each country involved can be restrained by that country if they can point to a reminder of susceptibility to attack by the partner country. These shadow boxing matches are mainly for internal consumption. As you rightly point out aircraft carriers are an expensive form of force projection. Using media is so much cheaper.

    Expect more of the same for decades to come. World government is so calming don’t you think?

  • Pat Donnelly

    Hi
    I read this site every week and am very in tune with what you say. Please keep up the good work!

    I have to take issue with this article however. PRC or PLA, is not concerned about US investments. They will buy as many as they are asked to as asked when asked, by USA. China will be consuming more and more internally, and stimulus such as western demand, adds very valuable margin. There has been a colossal transfer of technology to China by the west but above all by USA and they are very grateful. They are improving on this tech and will compete with Japan to show them how good they are. They are victims of inferiority attacks by Japan and USA having had to deal with centuries of English etc inferiority attacks. These drive China. Face, face, face!
    After the Aceh disaster, the General in charge of their PLA War college, threatened the USA with massive attacks if similar disasters befell western coastal cities in China. There was more bravado there as well. Their perception was an oil grab by US interests. They advised their allies in Burma to move their capital inland and up high from Rangoon, years ago.

    Ruling the waves means that Canute might well nowadays be able to command the waves to retreat!

    Lately there have been provocations at sea, needling attacks on a US cat, tracking subs out of Hainan.

    These publicity attacks are a reminder that they are partners. Just more diplomacy. Iran is another example of a mismatch between what is said publicly and what is a reality. Factions within each country involved can be restrained by that country if they can point to a reminder of susceptibility to attack by the partner country. These shadow boxing matches are mainly for internal consumption. As you rightly point out aircraft carriers are an expensive form of force projection. Using media is so much cheaper.

    Expect more of the same for decades to come. World government is so calming don’t you think?

  • Pat Donnelly

    The cost of world peace is world government so expect more GFC……nothing makes a population more happy to be governed than the prospect of unemployment/starvation/loss of electricity. It happened in the thirties, but perhaps “got away” from tptb control? “Strong” government was the problem then. They now seem to aim for weak democratic factionalized governments. The idea is that they are thereby paralyzed and should not end up stumbling into wars. One way to reduce power of governments is to increase dependence on foreign trade. Disrupting that should result in loss of food/electricity etc. Nationalism is therefore to be suppressed under the war on terror actions in many countries.
    FIRB is there to encourage negotiation by foreign entities if they are big enough. Replacement of capital by Chinese money may be good for Oz if it results in more development of mining elsewhere. Loss of RTZ is also possible and must feature in the mix. Must keep Our Dear Queen happy.
    Quite sanguine about all of this, just business as usual?

  • Pat Donnelly

    The cost of world peace is world government so expect more GFC……nothing makes a population more happy to be governed than the prospect of unemployment/starvation/loss of electricity. It happened in the thirties, but perhaps “got away” from tptb control? “Strong” government was the problem then. They now seem to aim for weak democratic factionalized governments. The idea is that they are thereby paralyzed and should not end up stumbling into wars. One way to reduce power of governments is to increase dependence on foreign trade. Disrupting that should result in loss of food/electricity etc. Nationalism is therefore to be suppressed under the war on terror actions in many countries.
    FIRB is there to encourage negotiation by foreign entities if they are big enough. Replacement of capital by Chinese money may be good for Oz if it results in more development of mining elsewhere. Loss of RTZ is also possible and must feature in the mix. Must keep Our Dear Queen happy.
    Quite sanguine about all of this, just business as usual?

  • Pete

    Pat I think you put far too much faith in Governments actually having a clue about what they are doing. I (almost) wish I could believe that they really were that deceptive and strategic, rather than reactive and fearful.

    Communist China wouldn’t want a world government unless it was run by China, surely? Welcome to Earth…capital Beijing 😉

  • Pete

    Pat I think you put far too much faith in Governments actually having a clue about what they are doing. I (almost) wish I could believe that they really were that deceptive and strategic, rather than reactive and fearful.

    Communist China wouldn’t want a world government unless it was run by China, surely? Welcome to Earth…capital Beijing 😉

  • Ed, this is a great summation of current events. Somehow I missed it earlier. I can’t believe what is happening between China and the USA. Since you posted, it seems that Wayne Swan has blocked the Chinese foreign investment deal.

    Your title is quite apocalyptic! Is war inevitable? What worries me is that I have heard recently people talking about the fallacy that The Great Depression was “fixed” by war. They weren’t warmongering but merely pointing to a potential “silver lining” should war break out. This scares me. These people were friends and family! People in Australia are barely admitting to the inevitability of recession and falling home prices and yet seem quite able to entertain the idea that “war might be good for the economy”…

  • Ed, this is a great summation of current events. Somehow I missed it earlier. I can’t believe what is happening between China and the USA. Since you posted, it seems that Wayne Swan has blocked the Chinese foreign investment deal.

    Your title is quite apocalyptic! Is war inevitable? What worries me is that I have heard recently people talking about the fallacy that The Great Depression was “fixed” by war. They weren’t warmongering but merely pointing to a potential “silver lining” should war break out. This scares me. These people were friends and family! People in Australia are barely admitting to the inevitability of recession and falling home prices and yet seem quite able to entertain the idea that “war might be good for the economy”…

  • Hi Steven!

    Yes, indeed this is very scary.

    That’s why WW2 could happen- the first step is for people to see the ‘good’ side of war, then they have to believe in the inevitability of war, then preparations for war began and finally actual shooting starts.

    We prefer a depression than war.

  • Hi Steven!

    Yes, indeed this is very scary.

    That’s why WW2 could happen- the first step is for people to see the ‘good’ side of war, then they have to believe in the inevitability of war, then preparations for war began and finally actual shooting starts.

    We prefer a depression than war.