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China Is “Worried” For The Safety Of Her U.S. Investments; Does This Mean We Should All Be Petrified?

March 14th, 2009
In 1815, just before the British Army was to march against Napoleon’s troops at the Battle of Waterloo, the Duke of Wellington conducted an inspection of his soldiers. “Do you think our men will strike fear into the hearts of the French?” inquired one of Wellington’s subordinate officers. “I don’t know about the enemy,” replied the Duke of Wellington. “But they sure scare the hell out of me.”
China’s Premier Wen Jiabao’s comment made at his annual news conference in Beijing reminded me of Wellington’s battlefield candor of almost two centuries ago. This is what Premier Wen had to say about the nearly $1 trillion China has loaned the United States government through the purchase of Treasury bills and other public debt instruments: “We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

Premier Wen is a little bit worried about the solvency of the U.S. government? If he is only a little worried, at least in public, we should all be massively terrified. The reason Wen’s understatement of China’s deepest fears is more than noteworthy is that he would not have made such a comment at a news conference, heavily covered by the world’s new media, unless it was reflective of the high level of anxiety permeating the Chinese leadership over the future fiscal health of the United States.

China has invested heavily in U.S. public debt. Clearly, the American government could not have funded its extensive public deficits over the past several years without the Chinese appetite for U.S. Treasury bills. And, until the advent of the Global Economic Crisis, it seemed like a good deal for China. Invest in the credit worthiness of the U.S. government, while subsidizing the debt-ridden American consumer to purchase more and more Chinese made goods, in the process stimulating the growth of the export-driven Chinese economy. That model, it would appear, does not seem to function in the midst of a synchronized global recession. However, there are probably more concrete reasons for Wen’s expression of “worry.”

China’s Ministry of State Security manages one of the largest and most effective intelligence gathering and espionage agencies on the planet. The primary target of the MSS in recent years has been economic data pertaining to the United States. Through a network of thousands of front companies and hordes of travelling businessmen, students, scholars and diplomats, the MSS has undoubtedly, with painstaking effort, put together a picture of the U.S. economic outlook which is both more accurate and more chilling than what is to be found on the pages of the Wall Street Journal or on the website of Bloomberg.com. What I think has prompted Premier Wen to utter such an uncharacteristically candid expression of doubt regarding the safety of China’s massive financial investment in the United States was a most recent intelligence briefing provided to Beijing’s top leadership.

What would that briefing have told the Chinese ruling elite? Obviously, I do not know for certain. However, this is my speculation. The most carefully guarded secrets in the United States, at present, are not those involving the launch codes for nuclear missiles or other military matters. Rather, they involve the confidential activities of the Federal Reserve and Treasury Department in their response to the Global Economic Crisis. It is being increasingly recognized that most of the U.S. banking sector is insolvent and being kept on life support through the massive injection of money by the Fed and Treasury Department. However, those two entities refuse to disclose which institutions are being paid, and how much is being allocated to each one. It is also not being openly disclosed how much fiat currency is being run off the printing presses of the Federal Reserve. However, the figures announced regarding guarantees by the Federal Reserve and Treasury for backstopping the losses and toxic assets of the American banking and financial sector have probably topped ten trillion dollars. Despite the massive borrowing by the U.S. government, the projected deficits and national indebtedness do not come even close to fulfilling the obligations that have been undertaken by the Federal Reserve and Treasury Department. What therefore seems to be happening is quantitative easing by the Fed. In effect, the Federal Reserve is simply manufacturing paper money out of thin air to “purchase” government debt, and in turn the U.S. Treasury is injecting the increased money supply into the banking sector.

If the above scenario is accurate or even close to reality, the U.S. dollar will eventually erode precipitously in value. Once that happens, China’s one trillion-dollar investment in U.S. government debt is toast.

You bet Wen Jiabao and the entire Chinese leadership are worried over the safety of their U.S. investments. Not only worried; they are terrified, as we all should be.



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