Miller Tabak & Co estimates that China now has over $1 trillion in foreign exchange reserves. Apparently, some $700 billion of these are held in U.S. dollars or dollar-denominated securities. The U.S. dollar came under immediate selling pressure.
Brian Dollan, research director at Forex.com, a unit of the currency-trading firm Gain Capital of New Jersey said, "The prime beneficiaries will be the euro, yen, [sterling] pound and the Australian dollar." (Interestingly, the last two mentioned have just raised their interest rates.)
As far as America is concerned, a weak dollar is inflationary in the medium-term. A weak dollar, in itself, could therefore lead to an increase in U.S. interest rates, as we have forecast, to stem inflation just when a recession looms.
The stagflation we have warned of may be nearer at hand that even we had thought.
[Editor's Note: Warren Buffett is betting billions that the dollar will crash.]
We can understand the natural, prudent wish for China to diversify its holdings, particularly when it may wish to purchase items from countries other than the U.S. in different currencies.
However, the timing of China’s announcement, coming on the heels of the Democratic election sweep raises other, more sinister political concerns.
It is well known that Senators Charles Schumer and Lindsey Graham have demanded a vote to impose tariffs as high as 27.5% on Chinese goods to stem the massive flow of American imports from China. Treasury Secretary Henry Paulson managed to "persuade the Senators to delay their vote."
In the meantime, members of Congress such as John Dingle have bashed China publicly.
Could this "whiff of Chinese grape shot" be designed to warn newly elected Democratic politicians not to make any further noises against free trade?
If so, the power of the Chinese dragon already appears to reach within the U.S.! This has been talked about for some time. But its realization will come as a severe shock to some.
The downward pressure on the dollar is a mere sideshow.
[Editor's Note: Nancy Pelosi Doesn't Want You to Read This.]
The fact that democratic, domestic policy within America could be dictated from outside, without even a hint of either diplomatic or military pressure or coercion, is food for real concern! It is a wake-up call to the old Western democracies.
History shows that people usually like their dreams. Waking up can be an experience, sometime jarring to the mind.
If some, indeed any aspects of American internal political policy are viewed by the world in general to be dictated by a mere hint from China what next? What of Western Democracy?
Will any other nations, besides Iran and North Korea think that, providing they have the tacit agreement of China, they can snub their noses at America with impunity?
What then of the Pax Americana and the stability of the world to which we are accustomed, including markets of all kinds?
We have long warned of very great risks in the present geo-political and economic world as massive changes have occurred silently over the past few years.
It is just one reason that we have recommended our readers accumulate cash, short-term quality bonds and gold.
