China and Brazil Opening Currency Swaps to Bypass U.S. Dollars

Zero HedgeThe USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap

Japan and China Drop Dollar for Mutual Trade

The Golden TruthIs the Bell Tolling for the U.S. Dollar?

I bring this up because a news item was announced late Friday evening [this was on May 29th – LJ], after most people has shut their business eyes and ears for the long holiday weekend, that will have significant consequences for the U.S. dollar’s reserve currency status.  China and Japan announced that they are going to start directly trading in their respective currencies – the yuan and the yen – and completely bypass using the U.S. dollar as the currency for exchange.  This news report is dated from Sunday, but the first reports hit the newswires on Friday evening:  LINK.  It blows my mind that more is not being commented on or reported about this.  China is methodically and slowly withdrawing from its use of the U.S. dollar. This is a significant step to that end, as China is now the world’s largest importer/exporter and Japan is a major trading partner for them.

Al Jazeera is reporting that China and Japan are in fact trading without dollars as of June 1.

Life of Reserve Currency

PreviouslyOUT: Paying with Dollars IN: Paying with PayPal, Gold

US Debt to GDP Passes 101%

Zero HedgeAs US Debt To GDP Passes 101%, The Global Debt Ponzi Enters Its Final Stages

Most people still think of China as buying our debt, but China is unloading U.S. debt.

The biggest buyer of U.S. debt is … the U.S. And not retirement funds and investment firms. The biggest buyer of U.S. debt is the U.S. Federal Reserve, AKA the people who print the little green pieces of paper in your wallet with dead presidents on them. They buy U.S. debt and pay for it with money they print out of thin air. What could possiblie go wrong?

China’s Fake Disneyland is Saddest Place on Earth; Thomas Friedman Hardest Hit

China’s Deserted “Fake Disneyland”:

Situated on an area of around 100 acres, and 45 minutes drive from the center of Beijing, are the ruins of ‘Wonderland’. Construction stopped more than a decade ago, with developers promoting it as ‘the largest amusement park in Asia’. Funds were withdrawn due to disagreements over property prices with the local government and farmers. So what is left are the skeletal remains of a palace, a castle, and the steel beams of what could have been an indoor playground in the middle of a corn field.

All these structures of rusting steel and decaying cement, are another sad example of property development in China involving wasted money, wasted resources and the uprooting of farmers and their families. It is a reflection of the country’s property market which many analysts say the government must keep tightening steps in place. The worry is a massive increase in inflation and a speculative bubble that might burst, considering that property sales contribute to around 10 percent of China’s growth.

Claim: China’s economy on edge of collapse, Thomas Friedman hardest hit

Chinese TV Host Says Regime Nearly Bankrupt.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

Rampant inflation, high taxes, and pointless real estate projects that no one wants. Except for the high taxes, there have been hints about these problems all along. Only a fool or Thomas Friedman (but I repeat myself) believes the government statistics of a Communist dictatorship. Hat tip to Instapundit.

Backdoors in Chinese-made Defense Chips

Business InsiderThe Navy Bought Fake Chinese Microchips That Could Have Disarmed U.S. Missiles:

Last year, the U.S. Navy bought 59,000 microchips for use in everything from missiles to transponders and all of them turned out to be counterfeits from China.

Wired reports the chips weren’t only low-quality fakes, they had been made with a “back-door” and could have been remotely shut down at any time.

As someone I work with likes to say “Russian hackers just want money. Chinese hackers want secrets.”

China top buyer of gold, even though it can’t be made into delicious egg fu young

Wall Street JournalChina Is Now Top Gold Bug:

Chinese investors are snapping up gold bars and coins, buying more than ever before in the first quarter of 2011 and overtaking Indian buyers as the world’s biggest purchasers of the metal.

China’s investment demand for gold more than doubled to 90.9 metric tons in the first three months of the year, outpacing India’s modest rise to 85.6 tons, the World Gold Council said in its quarterly report on Thursday. China now accounts for 25% of gold investment demand, compared with India’s 23%.

PreviouslyMexico buys 100 tonnes of gold, which cannot be made into delicious tortillas

China finds $268 billion in Treasuries under couch cushions

China’s holdings of US debt jump 30 percent:

China, the biggest buyer of U.S. Treasury securities, owns a lot more than previously estimated.

In an annual revision of the figures, the Treasury Department said Monday that China’s holdings totaled $1.16 trillion at the end of December. That was an increase of 30 percent from an estimate the government made two weeks ago.

We were pretty sure we totally paid for the last pizza and thought we were square with China, but if that’s what the AmEx card says, that’s cool.

China May Have Mother of All Real Estate Bubbles

BusinessInsiderThere Are Now Enough Vacant Properties In China To House Over Half Of America.

Chris Martenson –  Guest Post: The Two Keys to Understanding China’s Housing Bubble:

My wife and I are fortunate to have a network of contacts and friends in China, and we learned that as long ago as 2004, the typical two-income middle class household in China—those in which wage earners make around $5,000 or more a year each—was buying one, two, or even three flats for investment purposes.

The apartments were not rented out, as this lowered the resale value, and renting out flats was a burden busy people didn’t care to shoulder. Since there is no property tax in China that is analogous to U.S. parcel taxes, and since the vast majority of buyers paid cash, then the carrying costs for these investment properties was very modest. (The equivalent of maintenance/condo fees in most of China are typically well under $100 per month).

Why are Chinese dumping the majority of their savings in housing? One reason is that there are precious few investment options, and many investors felt burned by the volatile Chinese stock market (as they are not allowed to invest in overseas funds). Real estate has two advantages over stocks: Everyone understands it has value as shelter, and housing has been rising far faster than China’s not-quite-benign rate of inflation.

Google switches Gmail to https by default

Information WeekGoogle: We’re Encrypting Everyone’s Gmail Automatically:

Whether or not the timing of this announcement has anything to do with Google’s recent actions in the Chinese market is unknown. The company today said that it is switching Gmail access to https for all users by default.

The company wrote in a blog post, “Using https helps protect data from being snooped by third parties, such as in public wifi hotspots. We initially left the choice of using it up to you because there’s a downside: https can make your mail slower since encrypted data doesn’t travel across the web as quickly as unencrypted data. Over the last few months, we’ve been researching the security/latency tradeoff and decided that turning https on for everyone was the right thing to do.”

In related news, Iran’s government has banned Gmail:

As the Iranian authorities attempt to stifle tomorrow’s protests surrounding the anniversary of the Iranian revolution, they are going one step further: Iran is permanently suspending access to Google’s Gmail. Earlier this week, we wrote about failing Internet connections in Iran.

The timing of these problems has been met with suspicion: February 11 (tomorrow) marks the anniversary of the Iranian revolution and gatherings are already being planned to protest against June’s alleged election fraud.

Money trouble in Big China

TelegraphChina has now become the biggest risk to the world economy

“The inherent problems of the international economic system have not been fully addressed,” said China’s president Hu Jintao. Indeed not. China is still exporting overcapacity to the rest of us on a grand scale, with deflationary consequences.

While some fret about liquidity-driven inflation, Justin Lin, World Bank chief economist, said the greater danger is that record levels of idle plant almost everywhere will feed a downward spiral of job cuts and corporate busts. “I’m more worried about deflation,” he said.

By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

China moves to become a global currency

TelegraphChina calls time on dollar hegemony

You can date the end of dollar hegemony from China’s decision last month to sell its first batch of sovereign bonds in Chinese yuan to foreigners.

Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.

“It’s the tolling of the bell,” said Michael Power from Investec Asset Management. “We are only beginning to grasp the enormity and historical significance of what has happened.”

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2009 stimulus spending by country as a percent of GDP

This really shows that this is a global slowdown, not just something specific to the U.S., though the U.S. meltdown is having secondary effects due to the sheer size of our economy.

That chart is from Eric Janzen’s latest piece, Debate: Are China’s stock and property markets dual bubbles that are about to pop? (subscription required). He’s not convinced they’re quite about to pop, but that they probably are at or near the top.

In summary:

  • The Fed will not raise interest rates to protect the dollar or before unemployment falls for six months or more, regardless of cost-push and supply crash inflation.
  • The dollar will rise in flight to safety response by global investors when China’s dual stock and property bubbles collapse in Q4 2009.
  • China is about where Japan was in late 1989 and the U.S. in early 2000, near the top of both stock market and housing bubbles, or at least close enough for the adventurous gambler to short it.

So China has its problems, too. That’s good only in the sense that the best thing going for the U.S. is that other countries may be more screwed up than us, which would allow us to preserve our position as the world’s reserve currency. It’s bad in that a crash in China could have unsettling results on the now-fragile U.S. economy.