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U.S. Govt Yuan Bond Threat to U.S. Dollar

Interest-Rates / US Dollar Jul 29, 2009 - 04:48 PM GMT

By: Jim_Willie_CB


Diamond Rated - Best Financial Markets Analysis ArticleThe tables are fast turning against the deeply indebted USGovt officials. USA Inc is in deep trouble. Its productive engines in both finance and industry are either wrecked or sputtering, even as its debt burden grows exponentially. Debt default litters the landscape. Next its sovereign bonds will be have to be sold to some extent outside the US$ Sphere, which will put at great risk its stock, namely the USDollar itself. Let’s call them USGovt Dragon Bonds.

The custodians desperately seek creditors to supply much needed capital in order to fund the gigantic and growing USGovt debts, which by the way are grossly understated. The last resort is to monetize the USTreasury Bond issuance, a process well along. With the aid of the USDollar Swap Facility, the USFed has been able to secretly bid on USTBonds from foreign soil, have it appear like foreign bids, and conceal the continued and broadening monetization initiative. The United States is boldly defying the creditor nations, printing money, and buying its own debt. When more fully revealed, the USDollar will suffer the consequences. A sense of betrayal will surely come, much like discovery that the CIA has been flooding the globe with counterfeit $100 bills, or Wall Street has been flooding the globe with counterfeit Fannie Mae Bonds. Closer to home, it is akin to selling lemonade has been secretly watered down, or putting lawn mower clippings into the reefer batch before sale.

Andy Xie is a former colleague of Stephen Roach at Morgan Stanley, and now a board member of Rosetta Stone Advisors. He is an Asian financial expert. He believes the USFed is locked in a tight corner, while the investment community suffers from a massive blind spot. He wrote, “The United States has no way out but to print money. Dollar weakness reflects the market’s wavering confidence in the Fed. If the wavering continues, it could lead to a dollar collapse. Markets are trading on imagination. The world is setting up for a big crash, again.” Contrast with a comment made by Jeffrey Immelt, the CEO of General Electric. He believes the US should take a cue from the Chinese, who are growing fast, invest in industry, and make things. Wow, what wisdom! So the great financial engineering movement promoted by Greenspan and Wall Street mainly produced big bond fees and a wrecked banking system. Yes, without any equivocation or doubt, tragically. The financial engineering devices were based upon innovation in leverage and fraud without benefit of tangible production, serving as the vast illusory machinery atop a gigantic system totally dependent upon inflation. It imploded. Another alternative exists, beyond Xie’s radar. In addition to hidden monetization will come issuance of USGovt bonds outside the US$ Sphere. When the news breaks, it will hit like a tsunami.


Talk is everywhere one turns that the USGovt has little recourse but to print money and cover their debts. Such moves shift the risk from the USTreasury Bond to the USDollar in clear fashion. The Chinese Govt and Bank officials have been extremely vocal in the last few months, especially in the last few weeks. They abhor and are angry at both the rising USGovt deficits and the rising risk from direct monetization of those deficits in debt issuance. One could fill an entire page with warnings by the Chinese against American profligacy, reckless policy, and more. Every week contains major news wire stories, which do not receive proper attention in the US financial press.

The Chinese are noticing even more dangerous developments, such as ineffective official stimulus, unproductive rescue of dead banks, endless credit derivative covered costs (AIG and Fannie Mae), entirely new programs with staggering price tags (health care), refused disclosure of disbursed Congressional funds, and tremendous waste, all of which not only result in gargantuan government deficits, but add risk to the USDollar from a failure standpoint. The criminal angle is increasingly being discussed in the open. Goldman Sachs has exposure from Ultimate Insider Trading software tools that were stolen, now being torn apart in London and Germany for evidence discovery. Perhaps worse, the US Federal Reserve is under challenge by the US Congress (in charge of its contract) for disclosure and audit that could eventually reach the US Supreme Court.

The Chinese are in town to meet with the USGovt officials on continued debt support. The public will surely NOT be told what is discussed. One informed contact wrote this morning that the US lies as a terminal patient in the Intensive Care Ward, and seeks a death with dignity from its Chinese creditor doctors. The challenge to China is to protect its main core of US$-based reserves, and to protect future investments. Incremental commitments must come with new more concrete protective measures. The financial markets are NOT factoring this in! They seem to operate on a ‘Business as Usual’ assumption that is dying rapidly.


In the past, the USGovt has actually boasted of a policy to inflate debts away by permitting inflation, and to anticipate debt repayment in cheaper dollars. In other words, permit the foreign creditors to take losses on the loan balance in real terms, a major betrayal. A double blow occurs when the USDollar falls and USTreasury yields rise, in the foreign creditor accounts. THE FOREIGNERS RESENT THIS POLICY TO THE EXTREME. Harken back to the 1970 decade, when the Arabs quadrupled the crude oil price. They reaped huge new windfall profits, as they realized enormous trade surpluses. But they were duped into recycling surpluses into USTreasury Bonds, probably with reminders of USMilitary protection. They suffered 30% losses on up to $100 billion in USTBonds invested. They remember. When USGovt officials promote a plan to inflate debts away, they are announcing a planned betrayal of foreign creditors. Nowadays, the US has much less financial power, prestige, and influence to force feed a policy to the creditor nations. The creditors are in revolt, are organizing, and have taken action at the grass roots level.

Times have changed in the entire psychology of credit support for the USGovt and USEconomy in a manner that is shocking, if not revolutionary. The creditor nations have begun to discuss new terms of continued support. Foreign creditors are noticing Uncle Sam groveling and in growing desperate and confusion. Behind the curtains, the Chinese have clearly struck some important deals. Rumors are ripe that in a March trip to Beijing, Secy State Hillary cut a deal promising Eminent Domain on US property in return for continued USTreasury Bond support. So maybe a shopping basket of thousands of homes, hundreds of commercial buildings, scads of idle industrial plants, and a few million acres of farmland are soon to be seized by the Chinese in exchange for USTreasury Bond debt. One must wonder. The American people, i.e. USA Inc shareholders, will be the last to know in this criminal syndicate environment, a hatched cloud from the Fascist Business Model. Seemingly on a quarterly basis, something must be handed to the Chinese for continued USTBond support. The USTreasury officials and USFed have lied through their teeth about avoiding direct monetization. If the Chinese have half a brain individually, they can see the back-door monetization with collusion of foreign central banks. The Chinese are in town for the next concession. One can only wonder. Well, the Jackass has a good idea of what comes next. It is just a matter of time.


The concept can be described in very simple terms. The vehicle is devastating in its effects and consequences. What are they exactly? The USGovt might soon issue bonds, except not in US$ denomination, but rather in Yuan currency. Out of the gate (with debt signposts), the USGovt must purchase gigantic swaths of Yuan and pay with USDollars. The result is a quantum decline in the US$ exchange rate relative to everything holding the Yuan together. The Chinese decided in 2005 to tie their Yuan currency to a basket of currencies, led by the US$, the Euro, the Yen, the British Pound, and a small additional group. So the direct purchase of Yuan by the Untied States, the newest upcoming member of the Third World, will have numerous profound effects to lift other currencies.

The direct consequences of USGovt Yuan Bonds would be vast, visible, lethal:

  • The USDollar exchange rate would fall with each debt issuance
  • The loan balance in USGovt debt would rise with a declining USDollar
  • The Yuan currency would be further established as a global reserve alternative
  • Continued trade settlement in Yuan terms would be enabled
  • Rise in entire cost structure to the USEconomy from commodity pricing
  • The risk of USTreasury Bond default grows with each passing new issuance

The Chinese want protection and assurance against the falling USDollar and even the growing principal risk of USTreasurys. Higher bond yields mean principal bond loss. Both currency and bond loss mean a powerful combined loss. Beijing wants protection and security in exchange for continued debt support. A Yuan-based bond issuance by the USDept Treasury, sold by the USFed would accomplish this to some degree. In a few years time, if the US$ exchange rate is 15% to 30% lower, the loan balance in Yuan terms would be unchanged. The cost to the USGovt grows by that percentage however. If the yield rises, then protection can be locked by means of making the debt securities of shorter maturity, like two to five years.

The Chinese have already been shifting their USTBond portfolio from long-term to short-term maturity. This has been the driving factor behind the rising 10-year USTreasury yield and the steeper yield curve. Perversely, the US banks enjoy a benefit. They can amplify their Carry Trade, borrow at the short end, invest in the long end, pocket the 2% to 3% difference, and even store their booty of bonds at the USFed itself. This is one reason the US banks are not lending to Main Street firms and households. They are too busy playing the USTBond Carry Trade under the aegis of the discredited US Federal Reserve. And the topic of Bank Consolidation has not even been raised, whereby the big US banks reverse the carry trade by buying up distressed regional banks. Maybe the Chinese will become involved in that racket as a fringe benefit. Maybe they have been tipped off to purchase stock in the giant pharmaceutical firms who will reap windfall profits as the swine flu is spread by means of faulty vaccines and forced inoculations.


The USGovt Yuan Bond will be a significant blow to the US financial sector from a psychological standpoint, a deep undercut to US supremacy and arrogance. China has not been able to supplant the USDollar from the top down within banking circles. The Yuan Bond will serve as the sword that shatters the highest tables finally, their first phalanx attack. The grassroots approach in international contract trade settlement, the bottom up, has already seen much progress. In time, the US$ fortress will be pretty, shiny, and full of cheesy fake marble, as it washes away to the sea. Less US$ demand will be seen in international trade contract settlement as a result, A KEY UNDERMINE TO THE USDOLLAR. Combine with more sales of USDollars to purchase Yuan necessary for the new bonds, to make for a deadly mix. We are talking about potential avalanches of US$ sales. The US$ exchange rate is at very high risk.

When other foreign creditors observe the USGovt Yuan Bond completion, they will want to execute the same. Prepare on the second round for Euro Bonds, Yen Bonds, maybe even Ruble Bonds and Loonie Bonds, as the Europeans, Japanese, Russians, and Canadians will want protection. They can demand it. The Chinese are the primary spearhead against the USDollar and its primacy as global reserve currency. Other nations will follow. The impact of the USGovt Yuan Bonds will be doubled when additional issuances are ordered and executed. The USFed will therefore morph into an agency that also purchases Chinese Yuan currency. Usually that means Chinese Govt sponsored debt securities, but also Chinese Corporate debt securities. Later, the Chinese will figure it out, and issue Mortgage debt securities, even Automobile and Credit Card debt securities. Thus the practical impact will be vast development stimulus for the Chinese Economy, as the USEconomy will slide into a Third World zone of under-development, deprivation, and destitution. China will assume the role of a predatory creditor nation, with the full privilege of either influence or abuse at their disposal. Reality thus strikes soon. Welcome to the post-Lehman era, with gratitude to Wall Street. Never lose sight of the role the US Federal Reserve has had in the destruction of the financial, economic, and implicitly political structure of the United States, now the Untied States.

Some precedent is forming. The US-based discount retail giant chain Wal-Mart has sold $1.1 billion in Samurai Bonds, denominated in Yen currency. The bonds hit the Japanese market in two tranches comprised of  ¥83.1 billion in fixed-rate bonds and ¥16.9 billion in floating-rate bonds. The fixed-rate bond coupon was set at 55 basis points above prevailing yen swaps, while that of the floating-rate bonds was set at 60 basis points above the six-month LIBOR offered rate for yen. So Wal-Mart must be watchful of the US$ exchange rate relative to the Yen. US corporations will watch and learn, perhaps with a certain amount of dismay and trepidation. Government debt will follow like night follows day. With Japanese bonds called Samurai Bonds, one should expect the Chinese bonds to be called Dragon Bonds. The name is suitable, since the hot dragon breath will burn US$ paper globally.

The Japanese are bracing politically for a shun of typical obedient USTreasury purchases, or at least an altered course. In May a prominent Japanese politician called for no more loans to the USGovt based in USDollars, only in Japanese Yen. At the same time, some influential currency traders in Tokyo predicted that the US$ exchange rate would fall by 50% against the yen. Listen to an audio tape from the British Broadcasting Corp (CLICK HERE) to hear the debate and to learn details of how Asian business has suffered. The benefit to the US in both business and finance has come at a chronic Asian heavy cost. To shore up the shaky USFed primary bond dealer crew, they signed up two Canadian banks. What suckers! They also signed up Nomura Securities in Tokyo as primary dealer, making it the third firm to join the network of securities firms that underwrite the USGovt debt this year. Nomura was a primary dealer from 1986 through 2007, when it ended the role following a $656 million loss on US home loans. They are back for more losses.


We have come a long way from January when accusing China of currency manipulations, when accusing them of saving too much money and inflicting damage on the USEconomy, both absolute utter nonsense and extremely harmful propaganda. The USGovt officials and US bank officials have a remarkable ability to blame other nations for their own incredibly self-destructive policies and track record. These actions are without precedent, to insult and lay blame improperly on a creditor nation when the United States insolvent financial condition teeters toward bankruptcy, held up by more interventions, more fraud, and more phony money. Such accusations were delivered against China, immediately after the historic bank system breakdown in the United States tied directly to lending standard insanity for US home loans, insane bond leverage and packaging by Wall Street firms, corrupted debt rating agency with profound collusion, and a USFed central bank totally asleep at the wheel for half a decade. The entire financial system within the United States suffered a near fatal heart attack from a designed inflation policy combined with total carte blanche on reckless, predatory, and often illegal bank practices. The US bankers have since declared numerous errors committed, which is a euphemism for grand fraud. Even the London economist clowns admit a collective error from excess enthusiasm, a euphemism for grotesque structural defects and reckless policy errors.

Yet in the wake of all this failed policy, repeated crises, deep embarrassment from falling off the pedestal, the American leaders saw fit to accuse China of currency manipulation, excessive savings, and irresponsible export of boatloads of funds into the US debt and inflation machinery. If the truth be known, the Chinese merely served as a device to provide the excessive debt collateralized by the US housing sector a round trip back to the USEconomy. The US households used the home equity funds to spend on Chinese exported finished products. The Chinese cooperatively and dutifully recycled their trade surpluses into USTreasury Bonds and USAgency Mortgage Bonds. Creditors led by China are now angry enough at baseless accusations in the past to make tougher rules for continued credit support.

The blame game is the grand footnote in the mythology chapters, after events go awry. The Chinese obediently permitted the US debt machinery to provide the desired destructive impetus to support the USEconomy, all at US request. Between the years 2002 and 2004, US firms at the urge of the USGovt installed over $23 billion in direct foreign investment. The battle cry for the US economists and bankers was to realize benefits within the USEconomy by means of ‘Low Cost Solutions’ in reckless heretical style. It served as the mythological ideological chapter of those years. How did that work out, Mr Greenspasm? How did that work out, Mr Rubin, who pushed for the Chinese Most Favored Nation status? How did that work out, Mr Paulson? The United States not only has told mythology stories for years, but has integrated them into the USEconomic fabric and the US mindset. Ignorant and untrained, the US sheeple continue to accept the heretical drivel as fact, since the clowns uttering policy have PhD and Wall Street pedigrees of highly questionable value. Past performance, nearly total failure, is not relevant. Hmm! The latest mythology chapters have been centered on the nonsensical Green Shoots and a contradictory Jobless Recovery, both false, both baseless, both convenient.


The credit market seems asleep once again at the wheel. A horrible USTreasury auction just was completed on Wednesday morning, with dreadful bid action, and surely too much volume. A whopping $250 billion in official USTreasury auctions is planned for this current week, which must seem like a misprint. That volume requires greater monetization, greater stock losses, or newer innovative programs to encourage foreign creditors. The bigger apparent misprint is the USGovt deficits. The Wednesday auction was for $39 billion, almost four times a typical entire month from over a year ago. It fetched only 1.92 bid/cover ratio, when a 2.20 ratio had been seen recently, with 2.689% in paid yield. One must be a moron to find USTBonds a safe prudent investment these days. Then again, there are plenty of blockheads who still manage funds. A few years ago these same nitwits bought mortgage bonds since they paid a higher yield. Look at the chart of the 10-year USTNote yield. It has reached a point of needed conclusion, where a near-term rising trend meets a long-term nearly flat trend. The relative strength is looking good. The stochastix index indicates a possible uptrend thrust. Watch the 20-week moving average (in blue) for a bullish crossover above the 50-wk MA (in red). By bullish is meant rising yield, which leads to falling bond principal value.

Typically, when the USTreasury Bonds lose value, the principal beneficiary is Gold. Today, the financial markets are still celebrating an increase in home sales and a home price index that is no longer falling. OVERLOOKED ARE MANY KEY THREATS TO THE USTREASURY COMPLEX, EACH BENEFITS TO GOLD. They overlook the tremendous hidden home supply covered up by the banks, in REO properties withheld from the market. They overlook the miserable USTreasury auction, with more bad auctions to come. They overlook the 96% decline in US corporate profits since October 2007, in a gutted USEconomy. They overlook the skyrocketing USGovt debt finance needs, sure to continue even worse. They overlook the global revolt against the USDollar as reserve currency, where broad initiatives have considerable support, enough at least to chip away at the throne for the US$ trade settlement. They overlook the ineffective stimulus to date, and the criminal disbursement of Congressional funds, most likely for Wall Street benefit purposes. They overlook the nearly universal global debasement (if not destruction) of money and the financial structures, and the failed central bank franchise model. So, easily translated, the Gold price is a bargain made even cheaper by a $10 discount offered today. Paper money is gradually being recognized as ruined.

The Gold price shows a clear rising trend when viewed from a certain perspective. With a price discount today, it has come down to the 20-week moving average in a move toward greater stability. It has also come down to a clear but unorthodox uptrend line of support, with five touch points to render it meaningful. Pressure mounts on the 1000 resistance level. What will take the Gold price finally over 1000? Very difficult question. Certainly, some kind of disturbance to the system, something factored incorrectly in recent months, a shock, a scandal. Perhaps a breakdown in an important sacred structure like the COMEX for gold or the USTreasury auction system. The billionaires of the Arab world, who largely control far more Western banks than people notice, have been deeply involved with independent third party gold bullion bank audits since the spring. Many gold accounts have been sold and replaced illegally by paper certificates by New York and London, the epicenter of financial fraud and theft. The blood on the floor has been cleaned up quietly. With certainty, threats to aggrieved parties have been delivered. The pressures mount toward a breakdown.

A sequence is clear. The gold cartel digs in its heels and defends a given level. They dump paper gold on the market periodically in defense of the in defensible. The sequence has the strange characteristic of lower highs and higher lows each time. A resolution is demanded. The gold cartel is fast running out of physical gold with which to fill their rifles and artillery cannons. Being shot with a paper bullet from a rifle surely hurts, but the effect to stop a rush of angry investors cannot be stopped by paper gunfire. Beware of upcoming shocks.


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