Ruh Ro, Raggy…

Looks like the Chinese government has had enough:

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.

The only question is, how bad will it get?  Ordinarily, this would lead to an increase in interest rates in order to coerce others to buy up Treasury securities.  The problem is that the Fed is holding to its Zero Interest Rate Program, and is not allowing interest rates to rise.

The end of the U.S. dollar reserve standard is almost upon us.  The Chinese hold almost $1.3 trillion in U.S. government debt (a mere 8% of the $17.1 trillion outstanding), and China’s refusal to purchase more debt probably won’t harm sales of securities since the Fed is already buying up 90% of all new debt issued.

The real question is, what is China going to do with the reserves it already has?  Sell them on the market, driving the value of the dollar down?  Buy up more farmland?  Buy more gold?  And what might China do with all that gold anyway?  Issue a new, gold backed yuan perhaps?

Ruh roh

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Categories: Borrowing, China, Debt, Depression

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