October 13, 2004

Todd Stein & Steven McIntyre
The Texas Hedge Report
October 11, 2004
Courtesy of

“Now, how do they pay for that deficit? They have to go borrow money. Most of it they borrow from the Chinese and the Japanese government. Sure, these countries are competing with us for good jobs, but how can we enforce our trade laws against our bankers? I mean, come on.” - Bill Clinton at the2004 Democratic National Convention


This quote by former President Bill Clinton was perhaps his most important quote in several years, yet the media didn’t give it much attention. While Clinton’s intentions were no doubt entirely political, it is worth some time to give a little thought to the growing purchases of US Dollars by Asian central banks.

Asian central banks have been financing America’s $500 billion current account deficit mostly via the purchasing of US Treasuries. To get a better grip on this number, try to understand that America needs $1 million of Asian capital every minute in order to maintain its current standard of living. Asia presently holds over $2 trillion in foreign exchange reserves and shows no sign of reversing this trend.

While it is not news that Asia's reserves continue to increase, it is worth nothing that Japan, China, South Korea and other countries have started to reassess their appetite for US Treasuries. Some Asian finance ministers have spoken out openly about diversifying out of dollars and plowing reserves into alternatives such as gold and euros. As the dollar has fallen to record lows against several currencies, more international scrutiny has been applied to how the United States would fund its fiscal and current account deficits without Asian credit. If America doesn’t decrease its dependence on foreign capital, the dollar could weaken further, forcing the Federal Reserve to choose between (1) protecting its currency by raising interest rates and choking off economic growth or (2) continue debasing the dollar which could potentially result in hyperinflation.

Unfortunately, American businesses, consumers and governmental organizations show no signs of reducing their addiction to foreign capital. Eventually, however, the pace of dollars pouring into Asian coffers will slow or, even scarier, reverse. And with a global dollar glut becoming reality, it will take an increasing amount of currency to purchase the same goods and services. When this happens, we expect to see rising prices at Wal-Mart stores, gas stations and grocery stores as tanker loads of dollars end up back on our shores.

The fact is that Japan and China have America by the throat economically - although a dollar crisis here will have adverse effects everywhere. While America’s military power is undisputed, there have been signs of China flexing its economic might in order to contain the United States militarily. Our government’s stance on Taiwan, for example, has changed significantly in China’s favor over the last decade. It was only eight years ago when the U.S. responded to Chinese missile threats by sending warships to the Taiwan Strait, in what would become the largest show of naval force since the Vietnam War. It will be interesting to see what America’s reaction will be to Chinese aggression in the future as its leaders have clearly stated that Taiwan is next in line for reunification. During the past few years, reports have surfaced that China has deployed hundreds of short-range ballistic missiles opposite Taiwan. According to the Asia Times, Pentagon officials told Taiwan that by next year, China might be able to deter US counterattacks as “China is adding not only 75 short-range missiles against Taiwan each year but also an inventory of amphibious carriers and light tanks, cruise missiles, unmanned aerial vehicles, and a network of surveillance satellites.”

So while President Clinton points out America’s inability to enforce its trade laws against its creditors, we suggest readers read the military and monetary tealeaves as well. If tensions arise with Japan or China, then we expect to see massive dollar selling as a result.

October 11, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report

Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets

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Posted by manystrom at October 13, 2004 06:39 AM

Great topic Michael, and amazing quote from Clinton.

I'm interested in the deconstruction of Chinese Communism, and how they've gone from such a totalitariam Communist government to emerging as the world's most rabid capitalist economy!

We all know the story of Russian Communism. Supposedly the mastermind, Raegan, forced them in to bankruptcy through the arms race (not a view I suscribe too, but at least we have a story).

But Chinese Communism just decided to morph one day in to Central Bank run Capitalism. All of a sudden the West is transferring all of our latest technology and capital (and jobs) to our former arch enemy - - and no one is saying why, other than their labor is cheap!

There was a song by the Hooters in the 70's at the peak of the Cold War which had a very memorable line in it; "I don't believe there are any Russians and their ain't no Yanks...just corporate criminals playing with tanks..."

Well those corporate criminals are bankers primarily and they play a game that the world's population can barely perceive, shrouded in secrecy and deception.

Clearly China is now being used to prop-up the US economy with their cheap consumer goods and by purchasing US debt - just when the US needed it the most. It's all very convenient - but the media have failed to explain the transition from Communism to Capitalism.

Cheers Rich

Posted by: Rich Lancaster at October 13, 2004 05:01 PM

One hand washes the other -- the Chinese have hundreds of millions of citizens who can either work, or use idle time to plot against their government. The communist regime is taking a pragmatic approach by opting for mass employment. Here in the U.S., we have declining employment, the impending retirement of the baby boomers, and a federal government that can't live within its means. How do we maintain an aura of wealth when nobody makes stuff anymore?

The solution is to buy all of the cheap Asian consumer goods they can ship to us and pay for them with money we borrow from the sellers! Bill Clinton shouldn't be too surprised by this -- after all he appointed Robert Rubin who conspired with Alan Greenspan to concoct this scheme.

Posted by: TJK at October 14, 2004 12:30 AM

Thing is we don't actually borrow THEIR money to pay for the goods - we print more of our paper and exchange it with them. THAT is the major anomaly here, why on earth do they allow that exchange when they know the state of the US currency and our lack of ability, over time, to make good on the promise it presents??

Posted by: Rich at October 14, 2004 04:43 AM

We get a lot of nice cheap goods and they get a lot of pieces of colored paper. Who is suckering whom?

Posted by: C. Maoxian at October 14, 2004 01:55 PM

While the USA get nice cheap products, they get nice colored paper ... And a booming industry.

Basically, asia is overinvesting, it speeds up its growth by lending to its main consumer.
Sooner or later the consumer will go broke. So that's stupid from asia as a whole. But if you look at it in competition terms, well, china doesn't want to lose a share of the US market to Japan, Japan to Korea and so on.
So all together they lend more to the consumer.
sooner or later, sooner than later, there will be a bankrupt US consumer without any industry, trying to buy suddenly expensive asian products and to repay its debt at much higher interest levels ...
On the other side, asian will have overextended industry facilities build so as to produce goods made for the west and not for their own population. Big crash ahead too.
In the long term, the US will rebuild an industrial base thanks to a much lower dollar (and may be some protectionism along the way)
Asians will redeploy their industries in order to build products for their own population.
All the companies will offer higher wages because they will compete for their inner market and not in order to sell on the global market.

Posted by: df at October 15, 2004 03:52 PM

df -- there is one problem with your scenario -- China/Taiwan and Japan produce far more goods than their internal markets can purchase. I agree that those economies are headed for a fall when the U.S. consumers stop buying, and the U.S. Treasury inflates away its debts. There is no easy way for those markets to make up for the huge overcapacity they have already built. The consequences for regional stability are enourmous.

Does the phase "Idle hands are the Devil's workshop" have an Asian equivalent?

Posted by: TJK at October 15, 2004 06:11 PM

China's 1.2 billion people are now going beyond the bike and radio and getting the car, house, stereo, flatscreen and PC. Some of the Indian's are too, but nothing like as many it seems as in China. So there is room, in the NWO way of thinking, for plenty of consumer growth in the global economy. After China and India there is almost the entire continent of Africa that desperately needs a make over and to be more tightly integrated in to the global economy. So I think that the production house of Asia will serve a role in supplying smaller emerging markets as they are integrated in to the NWO over the decades ahead.


Posted by: Rich at October 16, 2004 02:47 PM

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