U.S. Government Move Will Push Russia and China Toward Economic Matrimony

So its happened at last. All pretense of sanity has been summarily discarded in favor of the perpetual feedback loop. The Fed is now purchasing its own currency, kiting checks to itself in a flagrant display of Orwellian-esque doublespeak. The fact that bond traders and mainstream financial commentators hail the development demonstrates the depth of ignorance and/or beguilement prevalent in the collective economic imagination.

Gold’s immediate sprint to positive territory is the only economic signal so far to cast the announcement in its correct light. To categorize it as dollar negative and gold positive is to understate. This is the biggest step yet in the impending demise of the U.S. Dollar.

While the move is positioned in the media as evidence of the determination collectively embodied in the U.S. government to stimulate the economy, it is more accurately perceived as a pre-emptive move to offset the diminishing international interest in future participation in U.S. Treasury auctions. The ratio of domestic purchases to foreign ones have been skewing consistently towards domestic, and it is likely Chinese Premiere Wen Jiaboa’s comments about the safety of China’s investment in U.S. debt rattled Team Obama’s nerves substantially.

The question is whether or not the Chinese will be able to swallow this latest sleight of hand and not lose face by doing so. While they are indeed stuck in unenviable position in being damned if they do and damned if they don’t divest themselves of U.S. debt instruments, there can be little doubt that an exit from the position is both desired and sought.

The conundrum for China lies in the fact that if they keep the increasingly fragrant U.S. paper comprising $1 trillion of their foreign reserves, the gradual yet inevitable erosion of the value of that position means the net worth of China will be concurrently dragged downward.

But if they do start dumping Treasurys, then the value of the U.S. dollar would likely collapse as China’s move would lead the broader market into a wholesale rush to the exits, thereby accelerating their foreign reserve devaluation.

The announcement by the Fed that they are now buying Treasurys is a pre-emptive move designed to buy time for foreign holders of U.S. Treasurys as well as for the U.S. Federal Reserve.

What China is looking for is a way to trade the U.S. dollar denominated instruments for anything otherwise denominated, but to do so without the general perception of Chinese abandonment of U.S. debt.

Of note, China and Russia are cozying up to each other, burying past acrimony and evidently eyeing each other as potential trading salvation. A more powerful combination of trading partners could not likely be imagined, and a strong trade alliance between those two superpowers would have the twin effects of canceling out American military and economic superiority. Japan would quickly seek membership in such an alliance, and this eventuality is what will most likely put the final nail in the U.S. economic coffin and reorient the entire global economy to the east.

In 2008, China remained Russia's second largest trading partner only after the European Union, while Russia ranked as China's ninth largest, compared to the seventh in 2007, according the Chinese Ministry of Commerce.

Last month, the two nations signed a oil-for-loan deal, under which China offered Russia $25 billion in a long-term loan and Russia would supply 300 million tonnes of oil through pipelines to China from 2011 to 2030.

According to China People’s Daily, 2009 is the “Year of the Russian Language” in China, and joint cultural exchange programs have been organized between the two nation’s cultural ministries to enhance awareness of each other’s cultures, particularly among youth.

Alexander Zhukov, Deputy Prime Minister of Russia, said in the online chat on March 19 with Chinese visitors to People's Daily Online:

At lease 50 activities will be held during the Year of the Russian Language in China in 2009. Russian publications introducing Russian classical and modern literature, Russian textbooks, will be introduced to Chinese students.

Mr. Zhukov said that students of the two countries had joined well-organized and extensive exchanges in recent years. More Chinese children from quaked hit Sichuan province will go to sanatoriums in Russia, where they will learn Russian. Summer camps and winter camps will be held and exchange centers for youth will be built in China.

He disclosed that China had proposed to encourage thousands of students from some 2,000 middle schools and colleges in China and Russia to communicate with each other through the Internet. "We had very happy memories of exchanges between young people by writing letters in early years after the foundation of the People's Republic of China," said the Russian Deputy Prime Minister.

Some 20,000 Chinese students are studying in Russia. More than 500 of them have got fiscal support from the Russian federal government. Some 5,000 Russian students are in China. About 200 of them financed their programs through public funding.

Russia is a friendly neighbor of China, and People's Daily Online hopes to build a bridge between China and Russia by enhancing communications and exchanges, so as to make its own contribution to the development of a friendly China-Russia partnership." said He Jiazheng, President of People's Daily Online, who hosted the chat in Moscow.

Comments

[Will DiJohn:]

James, this is an excellent analysis of global gamesmanship. But no country is going to come out of this depression smiling. Who cares, Russia and China in bed may produce even less expensive offspring than Wal-mart, and we will buy them of course. There is no way to stop the devaluation of the dollar. We must plan a future using a devalued dollar. Both China and Russia already have worse problems than the US. I think our quality of life far exceeds either one. They may devalue us but: freedom, safety, schools, housing, sanitation, you name it, we can well afford to give up a little value. While Russia and China sleep comfortably together, they will be dreaming happy thoughts of Americans buying everything in sight! I definitely am on-board with the Gold, in my mind it is already the international currency and the only way to hold your true wealth. Best Regards.

Mar 20 03:51 PM

[Philly Jim:]

China will want to keep Russians poor and undereducated as long as they depend on them for their energy supplies. You will see a lot espionage and manipulation of political decisions between the two nations which could eventually cause a silent war between the two behemoths; Japan will not want to participate beyond normal trade relations, as they realize these two rising giants pose the greatest threat to their long-term security. A Southeast Asian Union is likely to emerge in which Japan will more actively participate to counter Chinese strength. African nations can easily do what the Chinese do now, low-tech manufacturing. If the U.S. wanted to play nasty, they could send U.S. companies to set-up shop in Africa with full support of the African Union and activate an anti-Chinese propaganda program.

Mar 20 05:22 PM

[China Guy:]

You sound thoughtful but you do not know enough about these countries to come to the correct conclusion. Russia and China do not trust each other, each believing the other betrayed them in the past. Even the demise of the dollar and decline of $1 trillion of assets does not change the fact that the Chinese have no where else to go. Is your suggestion that they buy Russian bonds? The $25 billion you mentioned for oil is a drop in the bucket and all part of a global Chinese policy of buying commodities (see bid for Rio Tinto).

The only Chinese that know how to speak Russian are over 70 years old. And you know what they would tell their children and grandchildren? Learn ENGLISH!

Mar 20 10:55 PM

[HaavBline:]

It is very rataional that China & Russia will seek closer economic ties and as much trade between them as possible. Which country is not desperately seeking business opportunities in order to keep more of its people employed and keep its national economic situation healthy?

From this modest base, the author allowed his fantasy to run away and concluded a Russia & China economic union with even Japan jumping in. This is very politically and economically naive. Although Russia offers natural resources that China & Japan needs, its does not offer a significant market for all the stuff China & Japan produces. And the Russians have always been very nervous about letting the Asians into their vast empty spaces.

To put it in very simple terms. Russians do not want to be China's Canada. Although most Americans have trouble understanding what this means, I am sure the Canadian do understand..

Mar 21 12:42 AM

[Dave Wrixon:]

He may not have the answers, indeed he may be greatly exacerbating the problem, but the distinction of causing the problem is down to the Americans.

I noticed the focus on language in the above article. Perhaps, the only way to get it across to Joe Six Pack how serious this is, is to make Chinese Language a compulsory subject in schools from the age of 7.


On Mar 20 10:40 AM nova wrote:

> Very good review.
>
> The world is going through a geopolitical evolution resulted from
> the US economic deterioration.
>
> As for China, Russia can offer to China (as well as to Japan) a vital
> and reliable access to natural resources China needs for its development.
>
>
> Clinton, Bush, and now Obama administrations inflicted terrible damage
> on US industrial capabilities.
>
> It appears that, unless Obama administration will make an immediate
> and decisive turnaround from a "welfare economy" to a free-market
> one, US domestic economy and US geopolitical standing will collapse
> quite rapidly.
>
> PS
> Obama either does not understand the seriousness of the present crisis
> or does not care about it. In any case, the dire consequences will
> follow.

Mar 21 03:27 AM

[EMS News:]

The Chinese cooked up this 50 Year Plan back in 1982. It involved luring the US into selling lots and lots of US government debt to China as well as luring US industries to relocate in China. Both strategic initiatives have been a roaring success.

China has a very simple plan: we go bankrupt, owing lots of money to China and then China is the victim of US perfidy and so no one will sell stuff to the US due to lack of trust while China goes to the UN and IMF and demands their money back, demonstrating the US is BANKRUPT.

The Chinese told me, back then, that they would far rather lose a trillion dollars than have an open war with the US [after all, they know what wars are like, unlike us!] and have the US lose all our power in Asia and our ability to dictate to the world, via the fiat dollar.

The ultimate plan is probably to go back to the old system: gold as the basis for TRADE FINANCES. That is, the money that flows out of a nation to pay for international settlements must have a gold basis. I am absolutely certain, this is their plan. And it is going just fine. They are NOT upset about things, they are simply amazed that it took only 25 years, half their schedule, to succeed.

Mar 21 09:22 AM

[huangthomas:]

Cold war mentality and rhetoric abound. We all have to learn to accommodate one another and try to live in peace.

Quantitative easing is a sad story for the US and inflation is coming. Most American don't realize that inflation is a massive tax increase on Americans.

Mar 21 11:34 AM

[carey_jim:]

I hate to go 'scholar' on you James but I have to say that from the time of Plato, propaganda has trumped truth telling.

Don't forget your history. Socrates taught that reasoned discussion was the best way of finding the truth but he was condemned to death for it, and the court of Athens said his crime was 'corrupting the youth of Athens.'

The Sophists were Socrates' principle enemies and were among the first advocates of using propaganda and advertising in place of logic.

The Sophists taught that 'man is the measure of all things', that we don't discover truth with logic but invent truth and then persuade people to believe it with rhetoric (the tools of persuasion.)

The Sophists won.

In the twentieth century, Freud took up the Socratic battle again and tried to persuade people that they should use reason to discover the truth about themselves and not rely on self-deluded ideas about their egos. (Self-propaganda and self-promotion.)

As an old man, Freud witnessed the triumph of irrationality over reason: The rise of Hitler and the Nazis and the near destruction of his own group, the Jews, not to mention the rest of humanity.

Possibly more realistic than Freud, Karl Marx taught that logic and reason were useless for convincing people of the economic and historical truths that the Marxists discovered. So Marx and his followers used the same judo that the Sophists used: rhetoric and propaganda.

In the West, the capitalists took up the communist challenge by inventing their own forms of propaganda, called advertising. The Cold War was not a war about truth but about emotion, rhetoric, advertising and propaganda.

We're all so used to propaganda and advertising that we hardly listen to logic and reason at all, not to mention listening to each other.

History doesn't teach us to be optimistic about the human race's capacity to be persuaded by logic and the facts.

All I'm saying is, 'Don't be surprised.'

Mar 21 12:54 PM

[Ferdinand E...:]

Excellent review. Well worth reading a couple of times and thinking about. And yes, Russia and China will enter into economic matrimony because they can only gain through such an arrangement.

Mar 21 04:26 PM

[5142152-337:]

James West, you have accomplished much in this article. Look at the posts. Thinking men making sensible paths for the rest of us to digest and follow. I, for one, will continue to accumulate physical silver and gold. I see no alternative to wealth preservation than PMs, save for the accumulation of LAND to grow one's food as the only use of money today.

Mar 21 06:02 PM

[friar tuck:]

i 've never heard so many chicken littles in all my born days. this is the united states of america. we, the people , will bring us out of this "economic crisis". when you lose, you deal with it as well as when you win. the ability to remain poised when you are losing is just as important as the ability to remain humble when you are winning. let's get on with it. ALL spending creates commerce and we all know that commerce creates jobs and ultimately, wealth. let's stop worrying about what's being spent and keep an eye on what's being earned.

Mar 21 07:58 PM

[dan-d:]

Believe me when I tell you there is absolutely no way China will partner with Russia in any but the most marginal of economic ties.
There is a history of mutual loathing that exist between these two nations that far surpasses anything you, in your naivete, can imagine.
Read your history and smarten up. Man, when I read what historically illerates such as yourself write it sickens me.

Attack the american government all you want, but while your at it don't forget to mention the hedge fund traders that are at the root cause of our economic 9/11. Their naked short selling of Goldmans, Lehmans, et. al. are the cause of the breakdown of ojur financial system worldwide. Their immorality and greed has caused misery and suffering for millions. Yet the many actually think it was the little guy not paying his/her mortgage that is to blame. Unregulated capitalist performing illegal financial act of economic psychopathy are what caused our current crisis and they have the gall to blame the poor. Run to Russia or China like big bad Bill Rogers I'm sure you'll be happier.

Mar 21 09:10 PM

[Tom B:]

"Japan would quickly seek membership in such an alliance,"

I don't agree at all; Japan has a FAR more sophisticated culture than either Russia and China, and Japan and China do NOT get along well.

I think China and Russia getting together would be a very, very GOOD thing. We've been doing this "friends" thing with China since Nixon, and, at best, we are "frenemies" with starkly disparate goals. You want an accurate assessment of China, talk to a Tibetan. Or a Taiwanese. Or someone in the former British territory of Hong Kong.

Mar 21 09:55 PM

[triplepoint:]

What's the big deal?

The USA imports too much, exports too little, and saves too little.

Through the normal course of things, this is being corrected. Only by the dollar falling and savings rate increase can the balance be shifted. Now it is happinging, and China et. al. seem no longer committed a low dollar. On the whole, the change is best for everyone.

Mar 21 10:54 PM

[icy:]

There are Chinese students (renting rooms from me adjacent to a US University) that have studied Russian, and currently, English

These students from China and Korea study hard, and learn quickly; their assimilation of English language and American cultural occurs quickly; some of them have had a similiar learning experience in Russia. They are equipted to be successful with either Russian or English-speaking futures.

Mar 22 01:03 AM

[change is t...:]

James West is such a cool name.

China and Russia distrust each other more than they distrust us. Don't be fooled by a couple of student exchanges and wacko conspiracy theorists. Et tu Japan ?.....don't make me laugh.

I would bet Russia, China and Japan will trade with each other in DOLLARS before any economic alliance of significance occurs. Russia and China are so economically backwards it isn't funny.

The Fed's move is a daring one. You may or may not know Greenspan said in one of his final Fed meetings "it is better to have the markets think the Fed does not know what they are doing than to believe monetary policy doesn't work".

Bernake is inflating/devaluing at the moment of a global physical supply and production overcapacity - against the specter of ALL currencies being devalued. This is not stupid, this is enormously shrewd. The world now has China's damned if you do, damned if you don't problem.

Mar 22 04:06 PM

[beijingpaddy:]

This article gets off to a very good start. The first couple of paragraphs are very enlightening. Pointing out some possible scenarios for sovereign holders of US debt is nicely done.

But when the author jumps from there to some of the possible geo-political repercussions vis-à-vis Sino-Russian ties, he goes off into the woods of wild speculation. Anybody who knows some basics things about the Chinese will understand that Sino-Russia ties are not born out of any mutual admiration. The Chinese have long memories and have not yet cleansed themselves entirely of their historical grievances. It will take some time (if ever) for them to forgive the Russians for tearing off Mongolia and those parts of Russia sitting above Manchuria, like Vladivostok, from China. Nor for unsuccessfully trying to also take Xinjiang and Tibet. Lots of the Mao-Stalin, Mao-Khrushchev problems stemmed from these land grabs. More likely the Chinese have taken a page out of the Kissinger game book and are playing some powers off against other ones. Don’t look for any Sino-Russian grand alliance anytime soon. The Chinese have been master diplomats for two thousand years. They are just biding their time until they get stronger.

As for Japan joining any Sino-Russian alliance, you can forget it. A stronger China only drives Japan more fully into the arms of the USA. The author should go into any bar in downtown Tokyo and strike up a casual conversation with the locals about Sino-Japanese relations. Make sure to mention some historical items just to get the blood moving after a few glasses of sake. Let’s not forget either that the Japanese have yet to sign a peace treaty with Russia ending WWII and won’t do so until Russia returns the land they also grabbed from them.

Sino-Russian trade is not booming. In fact the last few quarters have shown a drastic fall in Sino-Russian trade. As for the 20,000 Chinese students in Russia, it pales in comparison to the millions in the Anglo-American countries. Those 20,000 are probably the ones who failed the English proficiency exam at university and had no other choice. Of course the Russian government has to pay for them to study in Russia. Otherwise they would not go. Most Chinese students pay their own way to study in America and are very willing to do so. Returning to China with a Russian degree will not get you far, mostly a few laughs.

Mar 23 01:39 AM

[smilingpilgrim:]

From a Canadian of East European country origin that was a satelite of USSR:

You can have a strong China-Russia relationship w/o it being a carbon-copy of Canada's economic dependency on the US? Political and economic alliances are built on strength and self interest, not on friendships. The major difference is in Canadian and Russian mentality. Polite and placid Canadian peace-makers are worlds apart from the Russian aggressive "barbarian". In history, barbarians ruled! The Russian Bear can have it all: strong trade with China and economic independence. It is aggressive, has a huge ego, in fact a borderline megalomaniac personality, it's a control-freak and will not play second fiddle to anyone. It will play hard with everyone. Thanks to it's expansionist communist legacy, has its paws everywhere. The risk to this picture: Putin becomes Stalin.

Can economic need overcome centuries of Asian animosity? I think so. After all, the US of A were the Wild West not so long before becoming the greatest democracy on earth. Countries and people evolve, especially when there is much to lose. So that would not be out of the question, either.

Do I like my thoughts, no way! I would much prefer to have the US to succeed and stay the super power. But they have broken too many rules now. The great democracy has reverted to feudal type of wealth imbalances that can be only reconciled by tragedy and/or revolution. What form the reballancing will take in America is to be seen.

Personally, I have not idea what the printing of money in the US means for Candian $$. Any thoughts?

On Mar 21 12:42 AM HaavBline wrote:

> It is very rataional that China & Russia will seek closer economic
> ties and as much trade between them as possible. Which country is
> not desperately seeking business opportunities in order to keep more
> of its people employed and keep its national economic situation healthy?
>
>
> From this modest base, the author allowed his fantasy to run away
> and concluded a Russia & China economic union with even Japan
> jumping in. This is very politically and economically naive. Although
> Russia offers natural resources that China & Japan needs, its
> does not offer a significant market for all the stuff China &
> Japan produces. And the Russians have always been very nervous about
> letting the Asians into their vast empty spaces.
>
> To put it in very simple terms. Russians do not want to be China's
> Canada. Although most Americans have trouble understanding what this
> means, I am sure the Canadian do understand..

Mar 23 01:47 AM

[johnbee:]

There is one way to solve all the curent US problems for the man in the street and to provide jobs and a future. Its protectionism and isolationism- but it would see higher prices in the US and lower wages and the rich would bleed - as well as the US losing its place in the world, but that's inevitable anyhow in time- but not yet- so hang on in and play the dice. It took 150 years for the UK's empire to crumble.

Mar 23 09:44 AM

[Tom B:]

People talk about being "against protectionism", but that's like being against "taxes"; it's a continuum. There's overtaxation, which has obvious bad effects, and there's undertaxation, which means people don't get the Gov't. services they need. We are certainly UNDERprotecting our workers, by a wide margin, and that needs to change.

As I have said many times: China lacks environmental protections; human rights; and safety regulations on their exports. They pay wages that would be unlivable in the US. So, how can we compete other that SOME kind of tariff? 10, 20, 30%-- not, like 100%. What's too difficult about that for people to understand? Why should we be subsidizing THEIR irresponsible excesses?


On Mar 23 09:44 AM johnbee wrote:

> There is one way to solve all the curent US problems for the man
> in the street and to provide jobs and a future. Its protectionism
> and isolationism- but it would see higher prices in the US and lower
> wages and the rich would bleed - as well as the US losing its place
> in the world, but that's inevitable anyhow in time- but not yet-
> so hang on in and play the dice. It took 150 years for the UK's empire
> to crumble.

Mar 23 02:02 PM