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China Buys Euros as Fear of World Depression Grows

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littlekracker


China Buys Euros as Fear of World Depression Grows

August 25, 2010

The US Treasury has just announced that China’s official holdings of U.S. Treasury securities declined by about $30 billion between April and May of this year, from about $900 billion to some $868 billion. According to the US authorities, this means that Chinese holdings of US government paper are now at the lowest level in the past year. A 2% to 3% decline in a month does not qualify as massive dumping, but simply means that China is in the process of diversification. It is also very likely that China has more U.S. Treasury bonds than this official count would indicate, quite possibly through proxy purchases via Hong Kong and other places.

With the sales of existing homes in the United States falling by 27% this morning, together with disastrous statistics regarding unemployment and foreclosures, it ought to be obvious that the US economy is in depression. Even experts interviewed on CNBC are beginning to wake up to this obvious fact.

World Bond Bubble

On August 24, the Treasury’s two-year note reached its highest price in recorded history, meaning that the yield was at a record low. The entire world is piling into short-term U.S. Treasury paper, and many buyers cannot get enough. This makes a mockery out of the right wing reactionary refrain that the US equals Greece and soon will be unable to borrow. If, according to the crackpot Austrian theory, markets know things that individual humans cannot know, then surely the market is signaling a great desire for T
Treasury bills and Treasury notes at the short end. The main reason for this demand is of course fear and panic – coming from the growing awareness that the world is indeed experiencing the second wave of a world economic depression of colossal proportions.

There is now a large-scale international bond bubble involving, among others, US treasuries and German Bunds. Since the flash crash of May 6, many investors have fled the stock markets entirely. It is still too soon to sound the alarm on deflation ahead, but deflation has now appeared over the horizon as a concrete possibility – partly because so many major financial players are now convinced that deflation is the wave of the future. If this were to come about, it would mean a depression looking much more like 1929-1933 than the relatively more mild situation we have experienced over the last two years. The depression may be taking a turn toward something far more excruciating for the masses of the population. One by-product of that would be vastly decreased popular gullibility for the anti-government recipes of the libertarian Austrian school, which are tailored for those who have money, and which have very little appeal to people who are unemployed, homeless, and starving.

Also on August 24, the Japanese yen hit a 15-year high compared to the dollar, and a nine-year high compared to the euro. This kind of currency championship is a Pyrrhic victory which nobody wants, since it means the Japanese exports are in the process of being strangled. This is true currency chaos and world depression at the same time, pointing once again towards the urgent need to restore the fixed rate system of Bretton Woods, which was destroyed 39 years ago this month by Nixon and Kissinger, urged on by Milton Friedman and other snake oil economists.

For the past year, the main thrust of the London and New York financial centers has been the effort to export the Depression into Europe by means of a speculative attack on the government bonds of Greece, Spain, Portugal, and some other countries, all designed to provoke a panicked flight out of the euro, which would in turn allow the Anglo-Americans to loot and asset strip the accumulated wealth of the old continent. This was not a market event, but it orchestrated strategic attack, inspired by such figures as Soros, Einhorn, and Paulson. During July and the first half of August, it became apparent that this Blitzkrieg as originally planned had failed to reach its objectives. But the Anglo-Americans, one-trick ponies as always, maybe persisting in the assault.

China Blocks US-UK Attack On Euro

The Anglo-American hedge fund attack, as we have documented here, employed credit default swaps as the primary weapon against Greek, Portuguese, and Spanish government bonds. The failure of London and New York to induce a panic flight out of the euro during the May-June timeframe was partly results of the German self-defense measures, involving bans on naked credit default swaps and bans on naked shorting of German equities. In addition to this, Chinese support for the euro has played a decisive role.

There is every indication that the Chinese made a decision not to allow the destruction of the euro during the late spring and early summer. That decision was technical, commercial, and political at the same time. The technical part was the China sought to re-balance the basket of currencies it uses to maintain the international stability of the renminbi. As the euro looms larger in Chinese trade, purchases of euros and Eurobonds are in order. It is also worth pointing out that the Chinese have not delivered on their promise to radically raise the international value of the renminbi, as hysterically demanded by Tiny Tim Geithner and others.

The commercial and political sides of Chinese support for the euro were reflected in the June visit of the Chinese vice prime minister to Greece, notably to the port of Piraeus. This Chinese envoy signed more than a dozen important economic cooperation deals, including shipping and shipbuilding, telecom, and container ports. The deputy Greek finance minister, Theodoros Pangalos, was quoted as saying: “The Chinese want a gateway into Europe. They are not like these Wall Street [blankety-blanks], pushing financial investments on paper. The Chinese deal in real things, in merchandise. And they will help the real economy in Greece.”1 The emphasis on the production of tangible physical commodities by the Chinese, in contrast to Wall Street’s reliance on a mass of toxic and kited derivatives, points to the real basis of Chinese economic ascendancy. If the Chinese are wise, they will not go overboard with short-term greed, but rather be ready for generous concessions to the Greek labor movement, so as to get the unions on their side. In any case, these euro-denominated Greek purchases are one obvious reason why Beijing is holding fewer greenbacks and more euros.

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