It’s time for a look through the postbox. It’s been a while since we’ve had a good rummage through my mailbox at [email protected]. I’ve been somewhat distracted with hosting our daily market broadcasts and all the wild events we’ve seen over the last few weeks.
While I’m afraid I don’t always respond to your emails, I read them all and appreciate all your feedback, both positive and negative.
We’ll start with this question first, as it’s very topically relevant right now. With the US now formally declaring Hong Kong under Beijing rule, and Chinese troops marching on to Indian soil, the question of how the US shall respond is brought into focus, and this reader looks to the US government’s debts held by the Chinese Communist Party (CCP):
As we both know, for years and years the Americans purchased cheap goods from China, for which China accepted payment in US dollars.
With the US dollars, China purchased huge quantities of Treasury Bills, which now make up a large part of China’s capital funds.
However, this means the US will have detailed records of just about every Treasury Bill the Chinese ever purchased, by now running into very many billions of dollars.
If the US wished to extract retribution from China over Covid-19, the easiest way to do this would be to declare all the Treasuries, currently in Chinese hands, to be invalid and worthless.
This, in turn, might well be enough to push the Chinese economy over the edge.
The Chinese would be forced to print money on a grand scale, resulting eventually in hyper-inflation and massive public unrest.
What do you think?
The fate of China’s vast hoard of US Treasury bonds is much debated and prophesied. You are correct that the US Treasury department knows who owns which ones, and it is possible to imagine that one day the US might default or halt interest payments on them. This is something Senator Lindsey Graham even proposed a few weeks back as part of a WuFlu reparations strategy.
While I agree this is something of a nuclear option which would do significant damage to the CCP, I think it’s very unlikely at this current point in time as the US still relies upon China for so much (medical equipment and pharmaceuticals have gained a lot of exposure but there are plenty of other sectors China has dominated).
And while a default on the trillion dollars’ worth of loans held by China would cause significant harm to China’s FX reserves and cause a lot of problems for the currency, China has plenty of other dollar assets elsewhere, and leverage over other countries which have them too. To default on the debts now, prior to pulling US supply chains out, and the development of the US’s rival to China’s Belt and Road Initiative – the Blue Dot Network – would be rash in my view. I wouldn’t rule it out in future, however.
Remember, we’re only at the beginning of Cold War II – it’ll become much more overt as time goes on, which leads me to a question from a reader who responded to How to wage war for 101 years (with change left over) last week. In that piece, we explored how William Paterson, the man who founded the Bank of England, created the mechanism by which the Royal Navy could afford to fight a battle every three weeks on average for 101 years – by granting the government a monopoly over money and the printing press with which to create it.
I believe the advent of Modern Monetary Theory, which argues that governments should print as much money until all the capacity in an economy is being used, will be adopted by a politico to argue for immense military spending in Cold War II. One reader wrote in to ask who I think that will be – the William Paterson of the 21st century to bring this about. The short answer is I’m not sure just yet when it comes to the Western countries – though Japan is making several steps in this direction without a missionary figure overtly declaring that printing money for guns is what it’s up to.
China is already doing this to some degree with its “civil-military fusion” doctrine, whereby the private sector in China can be swallowed into the state apparatus if it’s doing something that would further a military objective. While Paterson’s solution was to put control of the money supply in the hands of the government, the CCP’s solution is to put the private sector as a whole into the hands of the government. This effectively annuls the private sector’s status in China as being “private” at all, and is why I no longer purchase anything that’s made in China (damn tricky, but I’m determined).
Changing gears, one reader had a sizeable response to Tim Price’s recent commentary on Warren Buffett’s recent press conference:
Re. Berkshire Hathaway’s performance, you ought to compare it to the
metal he disparages at every opportunity. For all his headlines, cult
following and musings you will find that simply owning the sweat of the
sun over that same time period you will have out-performed BH and had
none of the hassle or worries.The Sage of Omaha has proved to be nothing but a fraud. Being close to
printing presses and, more importantly to those at the controls of the
printing press is the key to his “success”. He is nothing more than an
asset stripper in inside trader in the same bracket as Milken, Boesky
et al. He bought companies that were debt supported by fake money that
then used that to buy back their own shares. Just last month he was
tipped off by the government that all American airlines were to be effectively
grounded and he sold them instantly – at a loss having not had the time
to profit from their share buy-back schemes based on debt and fake money.
He boasts about “backing America” but consistently does the opposite. The
man is a crook.
I’m no Buffett scholar, so I’ve no insight to offer on the claims he’s a crook, though he does appear to be a very adept political operator though. And as you’ll know if you’ve been reading these letters, I am already a very big fan of “the sweat of the sun”, as is Tim Price for that matter. Gold’s gleam remains hard to resist.
And lastly, before I sign off for today…
When I said that it would be very difficult for the government to phase out cash and still finance espionage, one reader suggested an “old school” workaround:
How do you pay James Bond (and very inexpensively at the moment, I gather)?
Diamonds: small, portable, easily hidden – and forever.
Until tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
For charts and other financial/geopolitical content, follow me on Twitter: @FederalExcess.
Category: Market updates