Chinese Get Wise To US Dollar Antics

My apologies for lack of posts these last few days.  Two days of meetings and two more days of diagnosing a difficult to detect, intermittent internet problem has resulted in the replacement of our router and severely cut into blogging time.  We should be back to business as usual now.


Reader Bill has sent an interesting link from Bloomberg regarding advice to the US from an adviser to the Peoples Bank of China.

Some excerpts:

The U.S. should cut its government spending and sell some gold reserves to balance its budget and fund its recovery, the People’s Daily overseas edition reported, citing Xia Bin, an adviser to the People’s Bank of China.

The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.

“The U.S. has more than 8,000 tons of gold reserves; why can’t it sell some of it since the country wants to raise funds for economic recovery but doesn’t want to add more burden to the fiscal deficit,” Xia told the newspaper. He didn’t mention whether China would be willing to purchase any gold from the U.S.

China ranks as the world’s largest foreign holder of U.S. Treasuries, with $883.5 billion as of Sept. 30, according to the U.S. Treasury Department. China should raise its gold holdings and its 1,054 tons of reserves are inadequate compared with the 8,133 tons held by the U.S. and 3,408 tons by Germany, Meng Qingfa, a researcher at the China Chamber of International Commerce said on Oct. 27.

The U.S. won’t be able to get to the bottom of the problem if the government keeps relying on printing money, Xia said.

Comments:

The Chinese are starting to worry about the amount of treasuries they hold from their largest debtor nation the United States.

It is interesting to note that their state controlled media is permitting a PBOC official to suggest the idea of the US selling gold reserves. The comment appears to have state sanction.

This also raises another issue. Are the Chinese attempting to swap their fiat US dollars for hard assets? At the current gold price, 8100 tons is equivalent to $320 billion dollars, less than half the value of the US treasuries China holds.

What is frightening about this proposal is three fold.

One, China, the communist totalitarian state, would have nearly 10,000 ounces of gold - three times as much as any other country.

Two, the US deficit is now so large, that selling all the gold in Fort Knox would only pay for the deficit for 3 months at current gold prices!

Three, Fort Knox has not been audited completely since the 1950s. We simply are not sure how much gold it contains. It is possible that the official figures are inflated.

In conclusion, we need to watch carefully what China does with its Treasury holdings. Will it buy more, or will it gradually sell them off to reduce its exposure to the world's largest debtor?