Foreigners Are Dumping U.S. Debt At A Record Pace And Our $20 Trillion National Debt Is Poised To Become A Major Crisis

Dollar Spiral - Public DomainWhile most of the country has been focused on the inauguration of Donald Trump, a very real crisis has been brewing behind the scenes. Foreigners are dumping U.S. debt at a faster rate than we have ever seen before, and U.S. Treasury yields have been rising. This is potentially a massive problem, because our entire debt-fueled standard of living is dependent on foreigners lending us gigantic mountains of money at ultra-low interest rates. If the average rate of interest on U.S. government debt just got back to 5 percent, which would still be below the long-term average, we would be paying out about a trillion dollars a year just in interest on the national debt. If foreigners keep dumping our debt and if Treasury yields keep climbing, a major financial implosion of historic proportions is absolutely guaranteed within the next four years.

One of the most significant aspects of the “Obama legacy” is the appalling mountain of debt that he has left behind. As I write this article, the U.S. national debt is sitting at 19.944 trillion dollars. During Obama’s eight years, a staggering 9.3 trillion dollars was added to the national debt. When you break that number down, it comes to more than a hundred million dollars every single hour of every single day while Obama was living in the White House. In just two terms, Obama added almost as much to the national debt as all of the other presidents before him combined.

What Obama and the members of Congress that cooperated with him have done to future generations of Americans is beyond criminal.

Unfortunately, hardly anyone is talking about this right now, but the consequences are about to start catching up with us in a major way.

The only possible way that our game of “borrow, spend and stick future generations with the bill” can continue is if the rest of the world participates. In other words, we need them to continue to buy our debt.

Unfortunately for us, a major shift is now taking place. According to Zero Hedge, the most recent numbers that we have show foreigners dumping more than 400 million dollars of U.S. debt over the past 12 months…

The wholesale liquidation of US Treasuries continued in November, when according to the just released TIC data, foreign central banks sold another $936 million in US paper in November 2016, which due to an offset of $892 million in buying one year ago, means that for the 12 month period ended November, foreign central banks have now sold a new all time high of $405 million in the past 12 months, up from a record $403 million in LTM sales as of one month ago.

This isn’t a catastrophic emergency just yet, but if we continue down this road we will eventually get there. The only way that the U.S. government can continue on with business as usual is if it can continue to borrow billions upon billions of dollars at ultra-low interest rates. Now that Treasury yields are rising, some people are beginning to get quite nervous

As we pointed out one month ago, what has become increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a disturbing pace, something which in light of the recent surge in yields to over 2 year highs, appears to have been a prudent move.

In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia and other petroleum exporting nations, it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country’s soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.

Someday historians are going to look back in horror at what took place during the Obama years.

The amount that was added to the national debt during his years comes to “approximately $75,129 for every person in the United States who had a full-time job in December”. There is no possible justification for this. But because there haven’t been any catastrophic consequences so far, most people assume that this theft from future generations of Americans must be okay.

In a previous article, I explained that government debt greatly stimulates the economy. If we had not borrowed and spent 9.3 trillion dollars over the past eight years, we would be in the worst economic depression in U.S. history right now.

But most people don’t understand this. They don’t get the fact that we are living way, way above our means. And they also don’t get the fact that the only way that Donald Trump can keep the party going is to borrow and spend just like Obama was doing.

And even with all of Obama’s recklessness, he was still the only president in all of U.S. history not to have a single year when U.S. GDP grew by at least three percent. The following comes from the Hill

Despite the trillions of dollars in government spending pumped into the economy every year under Obama, America has never once enjoyed an annual GDP growth rate at 3 percent or higher, making Obama the least successful president—at least when it comes to economics—in modern history.

A historically sluggish GDP isn’t the only concern worth mentioning. Under Obama’s tenure, average annual food stamp enrollment has risen by more than 15 million (compared to 2008). The home ownership rate is the lowest it has been since 1995, the earliest year provided in the U.S. Census Bureau’s most recent report. The Bureau of Labor Statistics reports more than 590,000 Americans say they are not in the labor force because they are discouraged, a figure that’s 26 percent higher than even the worst annual average under George W. Bush. Additionally, the employment-population ratio has been continuously below the 60-percent threshold under Obama; the last time it was this low was 1985.

Now that Donald Trump is president, he is going to have some very hard choices in front of him.

If Donald Trump and the Republicans stop borrowing and spending so much money, the economy will immediately start suffering.

But if they do continue down the same path that Obama put us on, it is a recipe for national suicide.

So either we take our medicine now, or we risk completely destroying the bright future that our children and grandchildren were supposed to enjoy.

Wake up America, because time is running out.

Russia Threatens To Abandon The U.S. Dollar And Start Dumping U.S. Debt

The Kremlin - Photo by Pavel KazachkovThe Obama administration and the hotheads in Congress are threatening to hit Russia with “economic sanctions” for moving troops into Crimea.  Yes, those sanctions would sting a little bit, but what our politicians should be made aware of is the fact that Russian officials are promising “to respond” if economic sanctions are imposed on them.  As you will read about below, one top Kremlin adviser is even suggesting that Russia could abandon the U.S. dollar and start dumping U.S. debt.  In addition, he is also suggesting that if sanctions are imposed that Russian companies would not repay the debts that they owe U.S. banks.  Needless to say, Russia could do far more economic damage to the United States than the United States could do to Russia.  The U.S. financial system relies on the fact that the rest of the planet is going to use our currency to trade with one another and lend gigantic piles of it back to us at super low interest rates.  If the rest of the world starts changing their behavior, we are going to be in a massive amount of trouble.  Those that believe that the United States is “economically independent” are being quite delusional.

In order for U.S. economic sanctions against Russia to be effective, Europe would also have to get on board.

But that simply is not going to happen.

As I noted yesterday, Russia is the largest exporter of natural gas on the planet.  And Russia is also Europe’s largest supplier of energy.

There is no way that Europe could risk having Russia cut off the gas, especially considering the economic condition that Europe is currently in.

To get an idea of just how incredibly dependent the rest of Europe is on Russian natural gas, check out the chart in this article.  A whole bunch of European nations get more than half their natural gas from Russia.

And according to the Telegraph, even the UK has already completely ruled out economic sanctions…

Europe would be pushed back into recession, Russia into financial meltdown. This is not the sort of self harm Europe is prepared to contemplate right now. Indeed, thanks to the indiscretion of a UK official, who was snapped going into Downing Street with his briefing documents on display for all the world to see, we know this to be the case. Trade and financial sanctions have already been ruled out.

So the U.S. can do whatever it wants, but Europe is not going to be any help.  Perhaps Canada will stand with the U.S., but that will be about it.

On the flip side, the Russian Foreign Ministry is promising “to respond” if the United States does impose economic sanctions…

Russia said on Tuesday that it would retaliate if the United States imposed sanctions over Moscow’s actions in Ukraine.

We will have to respond,” Foreign Ministry spokesman Alexander Lukashevich said in a statement. “As always in such situations, provoked by rash and irresponsible actions by Washington, we stress: this is not our choice.”

So what would the response look like?

Lukashevich did not say, but top Kremlin adviser Sergei Glazyev is suggesting that Russia could abandon the U.S. dollar and refuse to pay back loans to U.S. banks…

“In the instance of sanctions being applied to stated institutions, we will have to declare the impossibility of returning those loans which were given to Russian institutions by U.S. banks,” RIA quoted Glazyev as saying.

“We will have to move into other currencies, create our own settlement system.”

He added: “We have excellent trade and economic relations with our partners in the east and south and we will find a way to reduce to nothing our financial dependence on the United States but even get out of the sanctions with a big profit to ourselves.”

Glazyev also stated that Russia could start dumping U.S. debt and encourage other nations to start doing the same.  The following comes from a Russian news source

“We hold a decent amount of treasury bonds – more than $200 billion – and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,” he said. “We will encourage everybody to dump US Treasury bonds, get rid of dollars as an unreliable currency and leave the US market.

Clearly Russian officials understand the economic leverage that they potentially have.  In fact, Glazyev seems fully convinced that Russia could cause “a crash for the financial system of the United States”

“An attempt to announce sanctions would end in a crash for the financial system of the United States, which would cause the end of the domination of the United States in the global financial system.”

On that last point Glazyev is perhaps overstating things.

On their own, the Russians could do a considerable amount of damage to the U.S. financial system, but I doubt that they could completely crash it.

However, if much of the rest of the world started following Russia’s lead, then things could get very interesting.

Just yesterday, I wrote about how China has chosen to publicly stand in agreement with Russia on the Ukrainian crisis.

If China also decided to abandon the U.S. dollar and start dumping U.S. debt, it would be an absolute nightmare for the U.S. financial system.

And keep in mind that the Chinese were already starting to dump a bit of U.S. debt even before this latest crisis.  In fact, China dumped nearly 50 billion dollars of U.S. debt in December alone.

The only way that the current bubble of debt-fueled false prosperity in the U.S. can continue is if the rest of the world continues to lend us trillions of dollars at ridiculously low interest rates that are way below the real rate of inflation.

If the rest of the world stops behaving in such an irrational manner, interest rates on U.S. government debt would rise dramatically and that would also mean that interest rates on virtually all other loans throughout our financial system would rise dramatically.

And if that happened, it would be a complete and utter nightmare for our economy.

Unfortunately, most Americans have no understanding of these things.  They just assume that we are “the greatest economy in the world” and that nothing is ever going to threaten that.

Well, the truth is that we are rapidly approaching a “turning point”, and after this bubble of false prosperity pops things will never be the same in the United States again.

The Kremlin - Photo by Pavel Kazachkov

Russia And China Stand In Agreement On Ukraine – And That Is Very Bad News For The United States

Vladimir_Putin_with_Zhang_DeguangSo much for “isolating” Russia.  The Chinese government is publicly siding with Russia on the crisis in Ukraine, and that is very bad news for the United States.  Not only does it mean that the U.S. is essentially powerless to do anything about the situation in Ukraine, it also means that Russia and China are starting to understand how much economic leverage that they really have.  Yes, the Obama administration can threaten to slap “sanctions” on Russia or threaten to kick Russia “out of the G8“, but those actions would not actually hurt too much.  On the other hand, Russia and China hold approximately 25 percent of all foreign-owned U.S. debt, and if they started massively dumping U.S. debt it could rapidly create a nightmare scenario.  In addition, it is important to remember that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world.  And China now imports more oil than anyone else on the planet does, including the United States.  If Russia and China got together and decided to kill the petrodollar, they could do it almost overnight.  So when it comes to Ukraine, it is definitely not the United States that has the leverage.

If China and the rest of the world abandoned Russia over Ukraine, that would be one thing.  But that is not happening at all.  In fact, China has chosen to publicly stand with Russia on this issue.  The following is from a Sky News article entitled “Russia And China ‘In Agreement’ Over Ukraine“…

Russian foreign minister Sergei Lavrov discussed Ukraine by telephone with his Chinese counterpart, Wang Yi, on Monday, and claimed they had “broadly coinciding points of view” on the situation there, according to a ministry statement.

And Chinese state news agency Xinhua is publicly rebuking the West for their handling of the Ukrainian crisis…

China’s state news agency Xinhua accused western powers of adopting a Cold War- like mindset towards Russia, trying to isolate Moscow at a time when much needed mediation is need to reach a diplomatic solution to the crisis in Crimea.

“Based on the fact that Russia and Ukraine have deep cultural, historical and economic connections, it is time for Western powers to abandon their Cold War thinking. Stop trying to exclude Russia from the political crisis they failed to mediate, and respect Russia’s unique role in mapping out the future of Ukraine,” Xinhua wrote in an opinion piece.

Apparently clueless as to how the geopolitical chips are falling, the Obama administration is busy planning all sorts of ways that it can punish Russia

Behind the scenes, Obama administration officials are preparing a series of possible battle plans for a potential economic assault on Russia in response to its invasion of Ukraine, an administration source close to the issue told The Daily Beast. Among the possible targets for these financial attacks: everyone from high-ranking Russian military officials to government leaders to top businessmen to Russian-speaking separatists in Ukraine. It’s all part of the work to prepare an executive order now under consideration at the Obama administration’s highest levels.

Does the Obama administration really want to start an “economic war” with Russia and potentially against China as well?

Considering how much money we owe them, and considering the fact that we desperately need them to continue to use the petrodollar, we stand to lose far more than they do.

This is one of the reasons why I have always insisted that the national debt was a national security issue.  By going into so much debt, we have given other nations such as Russia and China a tremendous amount of leverage over us.

Unfortunately, the debtmongers in Washington D.C. never have listened to common sense.

When it comes to Ukraine, there are other economic considerations as well.

For example, about 25 percent of the natural gas that Europe uses comes from Russia, and Ukraine only has about four months of natural gas supplies stockpiled.

If Russia cut off the natural gas, that would create some huge problems.  Fortunately, winter is just about over or the Russians would have even more leverage.

In addition, Ukraine is one of the leading exporters of wheat and corn on the planet, and a disruption in the growing of those crops could make the emerging global food crisis even worse.

But of course the biggest concern is that the Ukraine crisis could ultimately spark a global war.

Unfortunately, there is a treaty that requires the United States to defend Ukraine if it is attacked…

President Bill Clinton, along with the British, signed in 1994 a nearly forgotten agreement to protect Ukraine’s borders. Ukraine now is appealing to the countries that signed the agreement.

As the British Daily Mail points out, it means that, technically, if Russia were to invade Ukraine, it would be difficult for the U.S. and Britain to avoid going to war.

Given that the late Russian president, Boris Yeltsin also signed it, it was apparent that it wasn’t expected that the Russians would take the action that Putin now is undertaking.

And top Ukrainian politicians are now asking western nations to come to the aid of Ukraine militarily

Ukraine’s former prime minister Yulia Tymoshenko has appealed for the West to adopt ‘strongest means’ to intervene in Russia’s occupation of Crimea if diplomacy fails.

In an interview with CNN’s Christiane Amanpour, Tymoshenko, freed last week after the riots throughout the nation, said if Russia is allowed to ‘take away’ Crimea, life will change ‘practically everywhere in the world.’

She added: ‘Then we have to accept… an aggressor, can violate all the international agreements, take away territories, whenever she likes.’

On the other side, deposed Ukrainian President Viktor Yanukovych has formally requested that Russia militarily intervene in his nation…

Russia’s U.N. envoy said Monday that ousted Ukrainian President Viktor Yanukovych asked Russia to send troops to “establish legitimacy, peace, law and order, stability, and defending the people of Ukraine.” Russian Ambassador Vitaly Churkin read a letter from Yanukovych at the U.N. Security Council meeting.

“Ukraine is on the brink of civil war. In the country, there is chaos and anarchy. The life, the security and the rights of people, particularly in the southeast part in Crimea are being threatened. So under the influence of Western countries, there are open acts of terrorism and violence. People are being persecuted for language and political reasons,” the letter said. “So in this regard, I would call on the President of Russia, Mr. Putin, asking him to use the armed forces of the Russian Federation to establish legitimacy, peace, law and order, stability, and defending the people of Ukraine.”

And it is very important to note that Yanukovych would have never issued this letter if the Russian government has not asked him to.

So the stage is set.

Russia has already grabbed Crimea, and it is eyeing other territories in eastern Ukraine.

China is publicly backing Russia, and collectively they have a tremendous amount of economic leverage.

The Obama administration is barking loudly about what Russia has done, but the reality is that the U.S. has very little economic leverage at this point.

What the U.S. does have is the strongest military on the entire planet, but let us hope and pray that Obama does not decide to get the U.S. military involved in Ukraine.  That would be absolutely disastrous.

In the end, the U.S. has no good options in Ukraine.  The Obama administration helped aid and organize the violent revolution that overthrew the Ukrainian government, and now we have a giant mess.

Nobody is quite sure what comes next, but one thing is certain…

The relationship between the United States and Russia will never, ever be the same again.

China Starts To Make A Power Move Against The U.S. Dollar

US Dollars - Photo by selbstfotografiertIn order for our current level of debt-fueled prosperity to continue, the rest of the world must continue to use our dollars to trade with one another and must continue to buy our debt at ridiculously low interest rates.  Of course the number one foreign nation that we depend on to participate in our system is China.  China accounts for more global trade than anyone else on the planet (including the United States), and most of that trade is conducted in U.S. dollars.  This keeps demand for our dollars very high, and it ensures that we can import massive quantities of goods from overseas at very low cost.  As a major exporting nation, China ends up with gigantic piles of our dollars.  They lend many of those dollars back to us at ridiculously low interest rates.  At this point, China owns more of our national debt than any other country does.  But if China was to decide to quit playing our game and started moving away from U.S. dollars and U.S. debt, our economic prosperity could disappear very rapidly.  Demand for the U.S. dollar would fall and prices would go up.  And interest rates on our debt and everything else in our financial system would go up to crippling levels.  So it is absolutely critical to our financial future that China continues to play our game.

Unfortunately, there are signs that China has now decided to start looking for a smooth exit from the game.  In November, I wrote about how the central bank of China has announced that it is “no longer in China’s favor to accumulate foreign-exchange reserves”.  That means that the pile of U.S. dollars that China is sitting on is not going to get any higher.

In addition, China has signed a whole host of international currency agreements with other nations during the past couple of years which are going to result in less U.S. dollars being used in international trade.  You can read about many of these agreements in this article.

This week, we learned that China started to dump U.S. debt during the month of December.  Many have imagined that China would try to dump a flood of our debt on to the market all of a sudden once they decided to exit, but that simply does not make sense.  Instead, it makes sense for China to dump a bit of debt at a time so that the market will not panic and so that they can get close to full value for the paper that they are holding.

As Bloomberg reported the other day, China dumped nearly 50 billion dollars of U.S. debt during the month of December…

China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.

The nation pared its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday.

This is how I would do it if I was China.  I would try to dump 30, 40 or 50 billion dollars a month.  I would try to make a smooth exit and try to get as much for my U.S. debt paper as I could.

So if China is not going to stockpile U.S. dollars or U.S. debt any longer, what is it going to stockpile?

It is going to stockpile gold of course.  In fact, China has been voraciously stockpiling gold for quite some time, and their hunger for gold appears to be growing.

According to Bloomberg, more than 80 percent of the gold that was exported from Switzerland last month went to Asia…

Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said today in an e-mailed report. It imported most from the U.K.

Hong Kong was the top destination at 44 percent on a value basis, with India at 14 percent, the Bern-based customs agency said in its first breakdown of the gold trade data since 1980. Singapore accounted for 8.6 percent of exports, the United Arab Emirates 7.9 percent and China 6.3 percent.

When China imports gold, most of it goes through Hong Kong.  We know that imports of gold from Hong Kong into China are at an all-time record high, but we don’t know exactly how much gold China has accumulated at this point because they quit reporting that to the rest of the world a number of years ago.

When it comes to global finance, China is playing chess and the United States is playing checkers.  China knows that gold is a universal currency that will hold value over the long-term.  As the paper currencies of the world race toward collapse, China could end up holding most of the real money and that would be a huge game changer when they finally reveal that fact…

The announcement of China’s new gold hoard will send shockwaves through the financial markets, and make China and the Chinese yuan (their national currency) even bigger players at the international table.

International banking expert James Rickards compared it to a game of Texas Hold ‘Em poker:

“You want a big pile of chips. The U.S. has a big pile of chips, Europe has a big pile of chips. The U.S. has 8,000 tonnes [metric tons] of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player.”

There are some really good points made in the quote above, but I do take exception with a couple of things.  First of all, I believe that China now has far more than 5,000 tons of gold.  Secondly, I seriously doubt that the U.S. still actually has 8,000 tons of gold or that Europe still actually has 10,000 tons of gold.

As China (and eventually the rest of the world) moves away from a U.S.-based financial system, the consequences are going to be dramatic.

For instance, right now the average rate of interest that the U.S. government pays on debt is just 2.477 percent.  That is ridiculously low and it is way below the real rate of inflation.  It is simply not rational for anyone to lend the U.S. government money so cheaply, and at some point we are going to see a dramatic shift.

When that day arrives, interest rates are going to rise dramatically.  And if the average rate of interest on U.S. government debt rises to just 6 percent (and it has been much higher than that in the past), we will be paying out more than a trillion dollars a year just in interest on the national debt.

Even more frightening is what a rapidly changing interest rate environment would mean for our banking system.  There are four large U.S. banks that each have exposure to derivatives in excess of 40 trillion dollars.  You can find the identity of those banks right here.  Interest rate derivatives make up the biggest chunk of those derivatives contracts.  As John Embry told King World News just the other day, when that bubble bursts the carnage is going to be unprecedented…

“Stockman brought up a brilliant point, the fact that we have hundreds of trillions of dollars of interest rate swaps, which are polluting the world’s banking system. If we see growing volatility in interest rates, and I think that’s inevitable with what’s going on, that would cause spasms in the financial system. And if something goes wrong in the derivatives market, Heaven help us because the leverage that is imparted to the banking system through these derivatives is unholy.”

Unfortunately, very few of the “experts” will ever see this crash coming.

Very few of them saw it coming in 2000.

Very few of them saw it coming in 2008.

And very few of them will see it coming this time.

I really like what Paul B. Farrell had to say about this…

Early warnings of a crash are dismissed over and over (“just a temporary correction”). They gradually numb us about the inevitable. Time after time we forget history’s lessons. Until finally a big surprise catches us totally off-guard. Financial historian Niall Ferguson put it this way: Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash.

Till then, life just goes along quietly, hypnotizing us, making us vulnerable, till a shocker like Lehman Brothers upsets the balance. Then, says Ferguson, the crash is “accelerating suddenly, like a sports car … like a thief in the night.” It hits. Shocks us wide awake.

Don’t let the upcoming crash take you by surprise.

The warning signs are very clear.

Get ready while you still can.

Money - Photo by Pen Waggener

China Announces That It Is Going To Stop Stockpiling U.S. Dollars

Money - Photo by Pen WaggenerChina just dropped an absolute bombshell, but it was almost entirely ignored by the mainstream media in the United States.  The central bank of China has decided that it is “no longer in China’s favor to accumulate foreign-exchange reserves”.  During the third quarter of 2013, China’s foreign-exchange reserves were valued at approximately $3.66 trillion.  And of course the biggest chunk of that was made up of U.S. dollars.  For years, China has been accumulating dollars and working hard to keep the value of the dollar up and the value of the yuan down.  One of the goals has been to make Chinese products less expensive in the international marketplace.  But now China has announced that the time has come for it to stop stockpiling U.S. dollars.  And if that does indeed turn out to be the case, than many U.S. analysts are suggesting that China could also soon stop buying any more U.S. debt.  Needless to say, all of this would be very bad for the United States.

For years, China has been systematically propping up the value of the U.S. dollar and keeping the value of the yuan artificially low.  This has resulted in a massive flood of super cheap products from across the Pacific that U.S. consumers have been eagerly gobbling up.

For example, have you ever gone into a dollar store and wondered how anyone could possibly make a profit by making those products and selling them for just one dollar?

Well, the truth is that when you flip those products over you will find that almost all of them have been made outside of the United States.  In fact, the words “made in China” are probably the most common words in your entire household if you are anything like the typical American.

Thanks to the massively unbalanced trade that we have had with China, tens of thousands of our businesses, millions of our jobs and trillions of our dollars have left this country and gone over to China.

And now China has apparently decided that there is not much gutting of our economy left to do and that it is time to let the dollar collapse.  As I mentioned above, China has announced that it is going to stop stockpiling foreign-exchange reserves

The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.

It isn’t going to happen overnight, but the value of the U.S. dollar is going to start to go down, and all of that cheap stuff that you are used to buying at Wal-Mart and the dollar store is going to become a lot more expensive.

But of even more importance is what this latest move by China could mean for U.S. government debt.  As most Americans have heard, we are heavily dependent on foreign nations such as China lending us money.  Right now, China owns nearly 1.3 trillion dollars of our debt.  Unfortunately, as CNBC is noting, if China is going to quit stockpiling our dollars than it is likely that they will stop stockpiling our debt as well…

Analysts see this as the PBoC hinting that it will let its currency fluctuate, without intervention, thus negating the need for holding large reserves of the dollar. And if the dollar is no longer needed, then it could look to curb its purchases of dollar-denominated assets like U.S. Treasurys.

“If they are looking to reduce these purchases going forward then, yes, you’d have to look at who the marginal buyer would be,” Richard McGuire, a senior rate strategist at Rabobank told CNBC in an interview.

“Together, with the Federal Reserve tapering its bond purchases, it has the potential to add to the bearish long-term outlook on U.S. Treasurys.”

So who is going to buy all of our debt?

That is a very good question.

If the Federal Reserve starts tapering bond purchases and China quits buying our debt, who is going to fill the void?

If there is significantly less demand for government bonds, that will cause interest rates to rise dramatically.  And if interest rates rise dramatically from where they are now, that will set off the kind of nightmare scenario that I keep talking about.

In a previous article entitled “How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System“, I described how China could single-handedly cause immense devastation to the U.S. economy.

China accounts for more global trade that anyone else does, and they also own more of our debt than any other nation does.  If China starts dumping our dollars and our debt, much of the rest of the planet would likely follow suit and we would be in for a world of hurt.

And just this week there was another major announcement which indicates that China is getting ready to make a major move against the U.S. dollar.  According to Reuters, crude oil futures may soon be priced in yuan on the Shanghai Futures Exchange…

The Shanghai Futures Exchange (SHFE) may price its crude oil futures contract in yuan and use medium sour crude as its benchmark, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.

China, which overtook the United States as the world’s top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.

If that actually happens, that will be absolutely huge.

China is the number one importer of oil in the world, and it was only a matter of time before they started to openly challenge the petrodollar.

But even I didn’t think that we would see anything like this so quickly.

The world is changing, and most Americans have absolutely no idea what this is going to mean for them.  As demand for the U.S. dollar and U.S. debt goes down, the things that we buy at the store will cost a lot more, our standard of living will go down and it will become a lot more expensive for everyone (including the U.S. government) to borrow money.

Unfortunately, there isn’t much that can be done about any of this at this point.  When it comes to economics, China has been playing chess while the United States has been playing checkers.  And now decades of very, very foolish decisions are starting to catch up with us.

The false prosperity that most Americans are enjoying today will soon start disappearing, and most of them will have no idea why it is happening.

The years ahead are going to be very challenging, and so I hope that you are getting ready for them.

9 Signs That China Is Making A Move Against The U.S. Dollar

The U.S. DollarOn the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar.  You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely.  Right now, China is the number one exporter on the globe and China will have the largest economy on the planet at some point in the coming years.  The Chinese would like to see global currency usage reflect this shift in global economic power.  At the moment, most global trade is conducted in U.S. dollars and more than 60 percent of all global foreign exchange reserves are held in U.S. dollars.  This gives the United States an enormous built-in advantage, but thanks to decades of incredibly bad decisions this advantage is starting to erode.  And due to the recent political instability in Washington D.C., the Chinese sense vulnerability.  China has begun to publicly mock the level of U.S. debt, Chinese officials have publicly threatened to stop buying any more U.S. debt, the Chinese have started to aggressively make currency swap agreements with other major global powers, and China has been accumulating unprecedented amounts of gold.  All of these moves are setting up the moment in the future when China will completely pull the rug out from under the U.S. dollar.

Today, the U.S. financial system is the core of the global financial system.  Because nearly everybody uses the U.S. dollar to buy oil and to trade with one another, this creates a tremendous demand for U.S. dollars around the planet.  So other nations are generally very happy to take our dollars in exchange for oil, cheap plastic gadgets and other things that U.S. consumers “need”.

Major exporting nations accumulate huge piles of our dollars, but instead of just letting all of that money sit there, they often invest large portions of their currency reserves into U.S. Treasury bonds which can easily be liquidated if needed.

So if the U.S. financial system is the core of the global financial system, then U.S. debt is “the core of the core” as some people put it.  U.S. Treasury bonds fuel the print, borrow, spend cycle that the global economy depends upon.

That is why a U.S. debt default would be such a big deal.  A default would cause interest rates to skyrocket and the entire global economic system to go haywire.

Unfortunately for us, the U.S. debt spiral cannot go on indefinitely.  Our debt is growing far, far more rapidly than our GDP is, and therefore our debt is completely and totally unsustainable.

The Chinese understand what is going on, and when the dust settles they plan to be the last ones standing.  In the aftermath of a U.S. collapse, China anticipates having the largest economy on the planet, more gold than anyone else, and a respected international currency that the rest of the globe will be able to use to conduct international trade.

And China is not just going to sit back and wait for all of this to happen.  In fact, they are already doing lots of things to get the ball moving.  The following are 9 signs that China is making a move against the U.S. dollar…

#1 Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.

#2 China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.  This agreement will result in a lot less U.S. dollars being used in trade between China and Europe…

The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.

“It’s a way of promoting European and Chinese trade, but not doing it with the U.S. dollar,” said Brooks. “It’s a bit like cutting out the middleman, all of a sudden there’s potentially no U.S. dollar risk.”

#3 Back in June, China signed a major currency swap agreement with the United Kingdom.  This was another very important step toward internationalizing the yuan.

#4 China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.

#5 Mei Xinyu, Commerce Minister adviser to the Chinese government, warned this week that if the U.S. government ever does default that China may decide to completely stop buying U.S. Treasury bonds.

#6 According to Yahoo News, China has already been looking for ways to diversify away from the U.S. dollar…

There have been media reports this week that China’s State Administration of Foreign Exchange, the body that handles the country’s $3.66 trillion of foreign exchange reserve, is looking to diversify into real estate investments in Europe.

#7 Xinhua, the official news agency of China, called for a “de-Americanized world” this week, and also made the following statement about the political turmoil in Washington: “The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.”

#8 Xinhua also said the following about the U.S. debt deal on Thursday: “[P]oliticians in Washington have done nothing substantial but postponing once again the final bankruptcy of global confidence in the U.S. financial system”.  The commentary in the government-run publication also declared that the debt deal “was no more than prolonging the fuse of the U.S. debt bomb one inch longer.”

#9 China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations.  But instead of slowing down, the Chinese appear to be accelerating their gold buying.  In fact, money manager Stephen Leeb says that his sources are telling him that China plans to buy another 5,000 tons of gold.  There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.

So exactly what would happen if the Chinese announced someday that they were going to back their currency with gold and would no longer be using the U.S. dollar in international trade?

It would change the face of the global economy almost overnight.  In a previous article, I described some of the things that we could expect to see happen…

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy.  Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar.  At that point you could forget about cheap gasoline or cheap Chinese imports.  Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively.  If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living.  Today, most U.S. currency is actually used outside of the United States.  If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.

The fact that we get to print up giant mountains of money and virtually everyone around the world uses it has been a huge boon for the U.S. economy.

When that changes, the word “catastrophic” is not going to be nearly strong enough to describe what is going to happen.

According to a Rasmussen Reports survey that was released this week, only 13 percent of all Americans believe that the country is on the right track.  But the truth is that these are the good times.  The American people haven’t seen anything yet.

Someday people will look back and desperately wish that they could go back to the “good old days” of 2012 and 2013.  This is about as good as things are going to get, and it is only downhill from here.

12 Very Ominous Warnings About What A U.S. Debt Default Would Mean For The Global Economy

Ominous Clouds - Photo posted on Instagram by annekejongA U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash unlike anything that the world has ever seen before.  If the U.S. government purposely wanted to damage the global financial system, the best way that they could do that would be to default on U.S. debt obligations.  A U.S. debt default would cause stocks to crash, would cause bonds to crash, would cause interest rates to soar wildly out of control, would cause a massive credit crunch, and would cause a derivatives panic that would be absolutely unprecedented.  And that would just be for starters.  But don’t just take my word for it.  These are the things that top financial experts all over the planet are saying will happen if there is an extended U.S. debt default.

Because they are so close together, the “government shutdown” and the “debt ceiling deadline” are being confused by many Americans.

As I wrote about the other day, the “partial government shutdown” that we are experiencing right now is pretty much a non-event.  Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world.  In fact, only about 17 percent of the federal government is actually shut down at the moment.  This “shutdown” could continue for many more weeks and it would not affect the global economy too much.

On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous.

And if the U.S. government is eventually forced to start delaying interest payments on U.S. debt (which could potentially happen as soon as November), that would be absolutely catastrophic.

Once again, just don’t take my word for it.  The following are 12 very ominous warnings about what a U.S. debt default would mean for the global economy…

#1 Gerald Epstein, a professor of economics at the University of Massachusetts Amherst: “If the US does default, that will make the Lehman Brothers bankruptcy look like a cakewalk”

#2 Tim Bitsberger, a former Treasury official under President George W. Bush: “If we miss an interest payment, that would blow Lehman out of the water”

#3 Peter Tchir, founder of New York-based TF Market Advisors: “Once the system starts to break down related to settlement and payments, then liquidity disappears, as we saw after Lehman”

#4 Bill Isaac, chairman of Cincinnati-based Fifth Third Bancorp: “We can’t even imagine all the things that might happen, just like Henry Paulson couldn’t imagine all the bad things that might happen if he let Lehman go down”

#5 Jim Grant, founder of Grant’s Interest Rate Observer: “Financial markets are all confidence-based. If that confidence is shaken, you have disaster.”

#6 Richard Bove, VP of research at Rafferty Capital Markets: “If they seriously default on the debt, what we’re really talking about is a depression”

#7 Chinese vice finance minister Zhu Guangyao: “The U.S. is clearly aware of China’s concerns about the financial stalemate [in Washington] and China’s request for the US to ensure the safety of Chinese investments.”

#8 The U.S. Treasury Department: “A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse”

#9 Goldman Sachs: “We estimate that the fiscal pull-back would amount to 9pc of GDP. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly”

#10 Simon Johnson, former chief economist for the IMF: “It would be insane to default, but it’s no longer a zero-percent probability”

#11 Warren Buffett about the potential of a debt default: “It should be like nuclear bombs, basically too horrible to use”

#12 Bloomberg: “Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.”

A U.S. debt default could be the trigger for the “nightmare scenario” that so many people have been writing about in recent years.  In fact, it could greatly accelerate the timetable for the inevitable economic collapse that is coming.  A recent Yahoo article described some of the things that we would likely see in the event of an extended U.S. debt default…

A default would upend money markets, destroy bond funds, slam the brakes on lending, cause interest rates to spiral, make our banks insolvent, and deal a blow to our foreign trading partners and creditors around the globe; all of which would throw the U.S. and the world into economic disarray.

And of course stocks would crash big time.  Deutsche Bank’s David Bianco believes that if the U.S. government starts missing interest payments on U.S. Treasury bonds, we could see the S&P 500 go down to 850 by the end of the year.

There would be almost immediate panic among ordinary Americans as well.  In fact, it is being reported that some banks are already stuffing their ATM machines will extra cash just in case…

With just 10 days left to raise the debt ceiling and congressional Republicans threatening to force the government to default on its obligations, banks are taking some dramatic steps to prepare for the economic chaos that would result should the brinkmanship continue.

The Financial Times reports that one major U.S. bank has started stuffing its automatic teller machines with extra cash in preparation for a possible bank run from panicked depositors. The New York Times reports that another bank is weighing a plan to advance funds to customers who rely on Social Security and other government payments that could stop in the event of a default.

Let’s hope that cooler heads will prevail and that a U.S. debt default will be avoided.

Unfortunately, it appears that the Democrats are absolutely determined not to be moved from their current position a single inch.  They have decided to refuse to negotiate and demand that the Republicans give them every single thing that they want.

And who can really blame them for adopting that strategy?  After all, it has certainly worked in the past.  Whenever Democrats have stood united and have refused to give a single inch, the Republicans have always freaked out and caved in eventually.

Will this time be any different?

The funny thing is that once upon a time, Barack Obama was adamantly against any increase in the debt limit.  The following comes courtesy of Zero Hedge

Obama Debt Ceiling

But now Obama says that it is so unreasonable to be opposed to a debt limit increase that any negotiations are out of the question.

So which Obama is right?

If the Democrats will not negotiate, a debt default could still be avoided if the Republicans give in.

And that is what they always do, right?

Perhaps not this time.  Just check out what John Boehner had to say on Sunday

“I, working with my members, decided to do this in a unified way,” the speaker said — with demands to defund, delay or otherwise alter the Affordable Care Act.

Boehner had expected that the Obamacare fight would come during the next vote to raise the debt ceiling, “but, you know, working with my members, they decided, let’s do it now,” he said. “And the fact is, this fight was going to come, one way or another. We’re in the fight. We don’t want to shut the government down. We’ve passed bills to pay the troops. We passed bills to make sure the federal employees know that they’re going to be paid throughout this.”

“You’ve never seen a more dedicated group of people who are thoroughly concerned about the future of our country,” he said of House Republicans. “It is time for us to stand and fight.”

But will the Republicans really stand and fight?

In the past, betting on the intestinal fortitude of the Republican Party has been a loser every single time.

So we’ll see.  Boehner insists that this time is different.  Boehner insists that he is not going to fold like a 20 dollar suit this time.  In fact, when he was asked if the U.S. government was headed toward a debt default if Obama continued to refuse to negotiate, Boehner made the following statement

“That’s the path we’re on.”

The mainstream media has certainly been placing most of the blame at the feet of the Republicans, but at least the U.S. House of Representatives has been trying to get an agreement reached.  The House has voted 26 times since the Senate last voted.  Harry Reid has essentially shut the Senate down until the Republicans fold and give the Democrats exactly what they want.

The funny thing is that this could probably be solved very easily.  If the Democrats agreed to a one year delay to the individual mandate, the Republicans would probably jump at it.  And because of epic technical failures, hardly anyone has been able to get signed up for Obamacare anyway.  So a one year delay would give the Obama administration time to get their act together.

Unfortunately, the Democrats seem absolutely obsessed with the idea that they will not give the Republicans one single inch.  They seem to believe that this will be to their political benefit.

But this is a very dangerous game that they are playing.  The U.S. government must roll over 441 billion dollars of short-term debt between October 18th and November 15th.

If a debt ceiling increase is not in place by that time, it will send interest rates soaring.  Borrowing costs for state and local governments, corporations, and ordinary Americans will go through the roof and economic activity will be hit really hard.

And as detailed above, we could potentially be looking at a financial crash that would make 2008 look like a Sunday picnic.

So let us hope for a political solution soon.  That will at least kick the can down the road for a little bit longer.

If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.

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