The balance of financial terror
16 08 2007Peter Praet, the director of the Belgian National Bank claims the current credit crunch was an “accident he had foreseen“. The man is also president of the comité of the European Central Bank surveilling the banks.
WTF? An ‘accident’ he had foreseen? And what about acting?
I received quite some mails as a reaction to my posting of yesterday. Especially with regards to China dumping dollars.
Everyone seems to believe what the Washington Post and Bloomberg writes:
“China would be shooting itself in the foot,'’ said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. “They have just as much if not more to lose than the U.S. from divesting from Treasuries.'’
All that reasoning is based on the idea that when China would sell a percentage of its dollar reserves, China’s remaining holdings would be worth less. So what?American economists make a big mistake thinking that China needs large reserves. China does not need foreign reserves to support its currency and pay its trading bills. China doesn’t have foreign trade deficits, so it needs no reserves in other countries. And even if China had creditors, the creditors would be pleased to be paid in Yuan, as the currency would be thought to be undervalued.And then the same US economists claim that China would lose its US market when it would dump dollars. Think again. 70% of the goods in a Wal-Mart are made in China. China has all the manufacturing technology the US once had, hina has huge coastal cities with ports, 300 million of its population is into higher living standards and represents a massive internal market, 4 or 5 times as big as the US. It is the American consumers which become dependent on China imports. The same dependency as the US dependency on oil. China has many markets, Brazil represents 10% of China export. China can afford to lose the US market easier than the US can afford to lose the America brand names on Wal Mart’s shelves that are made in China. Actually, many consumer goods are even not made anymore in the US, even when consumers completely depend on it.
What the US wants is China to revalue the Yuan. Instead of a dollar being worth 8 Yuan, the want the dollar to be worth 5,5 Yuan. The US thinks that they will be able to end the large trade deficit that the US has with China. Naïve however. The US produces (50% of the US imports from China is from offshored production of the US in China) because of cheap labor, less harassment costs, etc… not because of the currency gain ! It would take a lot to move that production back into the US !
Think now what would happened if China would increase the value of the Yuan by 30 percent by dumping some of it’s US$ foreign reserves. Yes, it would main the remaining of their dollar holdings would decline by 30 %.
Start reading here.
Now write yourself the effects of this move; step by step. It’s an increasing cascade of events.
I’ll gladly comment with my version.
It is clear that none of the “luminaries” of the international financial community had forseen the crisis, they expected it to happen one day, but they didn’t have a clue when.
The Himalaya of international credit between governments and banks in the west is so big that the whole system is based on air.
China can pull the plug any time they want and the US cannot do anything about it, except change their currency to liquidate the black and fake dollars at least.
The turmoil is coming at a much bigger scale than we have seen so far in a not to distant future.