by Kellene The Red Dragon of Debt
A Few Good Men "You Can't Handle The Truth" photo c/o www.eucatastrophe.com
As I write today’s article, I keep hearing this familiar voice in the back of my mind. It’s the voice of Jack Nicholson as his character yells indignantly to Tom Cruise’s character in “A Few Good Men.” With blood vessels bulging around his neck and his face turning red, Nicholson's character convincing hollers “You can’t handle the truth!” to those present in the courtroom setting. This character delivers this line with the utmost of belief that the general population of our nation simply cannot or do not care to understand what goes on around them in spite of the fact that it critically affects their everyday living.
Today’s segment in this Financial Preparedness Series is written in defiance of the sentiments of mainstream manipulation who erroneously believe that citizens can’t handle the truth. It is my hope that you will absorb this information sufficiently so that you may be spurned to research, ponder, and realize the validity of this information for your own benefit and independence. In contrast to this memorable line of script, I believe that YES, you CAN handle the truth. So here it goes. Yesterday I wrote an article talking about a fictional country known as Uberland. In order to teach you a clear precept without the cloud of preconceived notions, I made the country fictitious. However, today we’re going to dig in to the reality of the world market with pure and simple facts. At present, the Chinese government holds approximately $2.13+ trillion dollars of U.S. debt. This is in the form of actual debt, currency, bonds, etc. This does not include the physical investments that China holds here in the U.S. such as real estate and business interests. In fact, China is at present the largest holder of foreign exchange reserves collectively and as of March 16 of this year is the largest owner of U.S. Treasuries. Japan and China have frequently traded first and second places in this regard over the last two years. (CRS Report RL32165, China’s Currency: Economic Issues and Options for U.S. Trade Policy, by Wayne M. Morrison and Marc Labonte.)
U.S. Treasury securities is what our nation presently uses to primarily finance our debt. Keep in mind that our present debt is running over $12 trillion dollars. In order to finance this debt, the U.S. needs to sell a LOT of U.S. treasuries and other assets to foreign investors. (I’ve recently read several reports that claim that the U.S. is more than 80% behind its goal for U.S. Treasury sales for this time of the year—but that’s another story.) Keep in mind that the good aspect to the U.S. in selling their debt to China, vs. other nations, is that China is notorious for holding onto the debt long-term. This means that the U.S. get’s to postpone its day of reckoning when they have to make good on buying back the bonds and other like assets and paying a highly compounded interest rate. With China purchasing our U.S. currency and just keeping it in store, it also helps the U.S. to essentially hide the impact of the large volume of U.S. dollars that are in circulation, because such a significant amount is just sitting in China doing nothing. We have utilized the Chinese relationship for so long, that they now hold 24% of all of our foreign debt. Does that make them our best friend or a formidable vulnerability? You decide with the content of this bit of information. Fortunately, our relationship with China does posses some minor checks and balances. The U.S. is the largest purchaser of Chinese exports. This is in part why China has invested in the U.S. so heavily. But when you really think about it, having China sustain us so heavily financially just so that we can have the financial strength to keep purchasing their exports is kind of like buying your own birthday present. The real danger in China having invested so heavily in us, and vice versa, is that if there is any curve ball, we’re in deep trouble. What kind of curve balls? The kind that come from Mother Nature or just plain consequences of physics. You can’t fight them. You can’t hide them. And they do have to be reckoned with. Suppose China suddenly experiences remorse in owning so much U.S. currency. If they were to sell off such assets, they would flood our market with our own currency thus rendering the currency we presently have in the market as useless in two ways. The first way would be that they would deplete us of our supply of “stuff.” If China dumps their currency back into our market, they will do so on an exchange. In other words, they will give us the U.S. dollars in exchange for something else. That something else could be their own currency, gold, or like assets. Having to make good on this debt we have with China will inevitably deplete our resources of “stuff.” Remember what I shared with you yesterday regarding what happens when you don't have enough “stuff” to back up your currency? So China will have “stuff” but we will simply be left with pieces of paper that are supposed to represent the “stuff” that backs them. And yet we will have dramatically depleted our “stuffs” in order to make good on our debt to China. Got it?
What will our currency be worth? photo c/o www.acus.org
The second consequence to China dumping our currency back into our market is that it would inherently deplete our present currency value. Let’s estimate that we presently have about 800-900 billion U.S. dollars in circulation in our nation. If China dumps their hundreds of billions of U.S. currency back into our market, then the value of our presently circulated currency goes way down—it’s call supply and demand. It’s very much like what’s happening in Florida right now with strawberry farmers simply destroying their crops instead of harvesting them to market. They normally get about $1.00 per pound of strawberries, however, since there are so many strawberries being brought to market right now, the going rate is only 25 cents per pound. So instead of harvesting them, the famers are simply destroying the strawberries in order to better influence the market of supply and demand. Supply and demand is just as important when it comes to our supply of U.S. currency as it is to our “stuff.” If money literally grew on tress in ever possible climate, then it wouldn’t have any worth. So if we get nearly double the influx of U.S. currency into our market all of the sudden, then it will have the same effect on it’s value. Let’s keep in mind that our nation does not have “the stuffs” to back up our currency like we used to. Remember, we have exhausted all of our wheat surplus. We no longer have any such surplus under control of the U.S. Government. We have also exhausted all of our gold reserves that we were supposed have universally backing our currency. Yup. There’s literally no gold sitting in Ft. Knox for the benefit of backing our currency. To make matters worse (and I’ve shared this with you countless times before) we no longer are provided with an accounting by the Federal Reserve of exactly how much currency is in circulation at present. (aka the M-3 Report) The $800-$900 billion is simply an estimate from many economists. But what if we are WAY off on that number since it’s being held in such secrecy? A better question is why would this number NEED to be held as secret if it wasn’t bad news?
Here’s the final way that China’s holdings could harm us significantly. They are presently the kingpin, so to speak. In other words, if China starts dumping their U.S. dollars, then other nations such as Japan, Russia, Taiwan and India (which are the top 5 holders of U.S. debt) will start dumping theirs as well. The consequences will immediately dilapidate our financial value as a nation. So, is it likely that China starts dumping a lot of their debt? Well, they certainly are getting nervous. Over a year ago the Chinese Premier seriously questioned the stability of our market and insisted that the U.S. go to extreme measures to show China that their investments in our debt were worthwhile. They have done so repeatedly just in the last month as well—blatantly expressing serious concerns in holding U.S. debt/assets. Part of the reasons for this is yet another layer of the problem. The agencies which actually rate the security of any known debt are no longer trustworthy to do so. Moody’s and Standard & Poor’s are two agencies that are required (and supposedly expertly reliable) to rate a debt/asset. They rate them usually anywhere from a “triple B” to a “triple A.” Well, they’ve lost a lot of their trust in doing so in the nation because THEY were the ones rating the horrible sub-prime mortgage packages as “triple A”, the highest rating available. As a result, China and other nations were purchasing these dangerous debt packages and left holding the bag when the bottom fell out. So China and other nations are dubious in accepting any rating that these two agencies provide. It’s the equivalent of you getting a full-ride scholarship to a college based on your grades, only to discover that you never even attended class and that you had simply bribed all of your teachers to put an A grade on your report card. Oh, and did I mention that all companies who want a rating have to PAY Moody’s and S&P to rate them? Conflict of interest, perhaps? So, what could possibly happen that would cause China to suddenly start dumping their U.S. assets? What would be so vital that they would HAVE to disrupt their relationships with the U.S. by doing so? Well, folks. That’s what we’re going to cover tomorrow. Hard Core Financial Preparedness Part I Hard Core Financial Preparedness Part II Hard Core Financial Preparedness Part IV
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