Just How Much Trouble is the US Economy In?

“China Threatens ‘Nuclear Option’ of Dollar Sales,” was the headline on a recent front page article in the Telegraph in the U.K, written by Ambrose Evans-Pritchard: www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

Excerpts from that article:

“The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning -- for the first time -- that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.”

The article also provides data from the US Treasury Department showing unprecedented outflows of $163 Billion from all forms of US investments. Asian investors alone dumped a stunning $52 Billion worth of US treasury bonds. It is the first time in years that foreigners have even sold more treasury certificates than they have purchased, and now they are dumping them like crazy. This means they think the value of the dollar will keep falling, so the sooner they cash in, the more money they are going to get.

But what does an ever more devalued dollar mean for us Americans? It means that it's going to take ever more dollars to buy any given item. This is called inflation. The comment from one think tank economist in Europe: “Woe betide US treasuries if inflation does not remain benign.” So the recent IMF warning that the dollar is still overvalued and will continue its slide, taking our buying power with it, is worrisome indeed. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/16/bcnchina116.xml

The comment of one British economist: “Washington was happy to see the dollar slide; they see it as a way of correcting the deficit.” (What better way to pay off the billions the US borrowed during the Vietnam war than to pay it off with dollars that are worth far less than the dollars that were originally borrowed, and if this means a corresponding drop in the buying power of the average American stooge, so be it.)

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The US government requires $70 billion a MONTH in capital inflows (borrowed money) to cover its current account deficit (i.e. the money it is spending – in Iraq for instance --  but not collecting in taxes from its citizenry.  Problem is, the key sources for borrowing this money are gradually drying up, as per the recent dumping of a stunning $52 Billion worth of US treasury bonds by Asian investors, just mentioned.  Central banks in Singapore, Korea, Taiwan, and Vietnam have all begun to cut purchases of US bonds of all kinds, or signaled an intent to do so.  Bottom line: These folks are not going to loan our government any more money, and there may be a whole lot of holders of US treasury certificates who will soon join them, as the value of the dollar continues to slide.

Front page headline from a recent issue of the Financial times of London: “Investors Flee U.S. Securities.”  From the article: “Foreign investors slash their holdings of US securities by a record amount as the credit squeeze intensifies.”  In other words, not only are foreigners dumping our treasury certificates, they’re also dumping out stocks, corporate bonds etc.  To wit:

“Foreign investors flee US securities. By Michael Mackenzie in New York. Published: October 16 2007 17:07 | Last updated: October 16 2007 21:16”

http://www.ft.com/cms/s/0/1ed4bb86-7bf8-11dc-be7e-0000779fd2ac.html

And where are a growing number of US investors putting their investment money?  Answer: outside the US. 

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