The Sort Of Decoupling You Don't Want
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2009-09-03 09:01 by Karl Denninger
in Musings Ignore this thread
The Sort Of Decoupling You Don't Want

I've been seeing more and more rumors fly around about China's "sovereign wealth fund" buying hard assets - and eschewing dollars.  Most of these claims have been in the "rumor" category, but today I finally found something sourced well-enough for me to consider pointing to it:

While CIC was set up only two years ago, funded with $200 billion in initial capital, a report to the U.S. Congress noted that according to top Chinese officials, it was created to improve the rate of return on China's $1.5 trillion in foreign exchange reserves and to soak up some of the nation's excess financial liquidity.  Depending on its performance with the initial allotment of $200 billion, the CIC might be allocated more of China's growing stock of foreign exchange reserves - and this has already proved to be the case.

That's a problem.  (Yes, I know the site in question is a "goldbug" type of site - even a blind squirrel and all....)

There are a  number of major problems brewing here, and none of them are the sort of thing I or anyone else with a brain want to see - although all of them may be inevitable.

The first is that China, unlike the US, has come to its senses regarding energy independence.  They are building nuclear plants - and lots of them - unlike the United States.  We're "scared" of the issue of nuclear waste and safety considerations, while China has come to its senses in this regard: There is no such thing as risk-free energy; environmental and health damage from our existing power-production infrastructure in one year dramatically exceeds that of nuclear energy over its entire time on the planet!

President Obama talks about "green energy" but the fact of the matter is that there is no "green" alternative that (1) we can utilize now, and (2) can replace "base load" capacity in the United States - other than nuclear fission.  It is also a fact that nuclear fission can be entirely fuel-cycle neutral, as we proved the technical ability to run breeder reactors in the 1960s.  This goal is not beyond technical feasibility given today's technology - rather, this is about political BS.

Second, China isn't just talking about diversifying away from the dollar and putting together an energy independence program - they're doing it when it comes to paper assets as well:

Sept. 3 (Bloomberg) -- The International Monetary Fund, which in July outlined plans to issue bonds to member countries, signed an agreement with China under which the Asian nation would buy as much as $50 billion of the notes.

I note that this is 1/20th of China's commitment to the dollar.  That sounds puny, right?  Its not.  $50 billion is unlikely to be new investment; rather, it is likely to be part of diversification away from the dollar.

America has, for the past decade and especially for the last two years, operated on the belief that we can literally hide the fraudulent credit creation of the last decade by shoving trillions of dollars of new debt down other nation's throats.  We also believe we can fund profligate spending, including an entitlement culture that our government has embedded and imbued in our citizens, through the same process.

China appears to have had enough of this, despite the "nice-nice" forward appearance and smiles at public relations events with Tim Geithner and President Obama, and has begun the process of what is certain to be a messy divorce from dependence on the dollar as a means of sterilizing their trade balance.

America had better wake up - and fast.  While at present we are enjoying record low interest carrying costs for our external debt, this is by no means a right nor is it something we can expect to continue.  The irresponsible and outrageous actions of our Federal Reserve and both the previous and present Administrations, focusing on aiding and abetting "Fraud Street's" machinations, both can and will come to roost, likely at a very uncomfortable and undesirable time.