China Betting on Default?

Addison Wiggin – May 18, 2011

  • Viral video (in Chinese) makes sense of the U.S. debt ceiling… as China dumps U.S. Treasuries…
  • Why selling the gold in Fort Knox is a good idea, even if it only keeps the lights on a few weeks… and the surprise advocate…
  • Oil back in striking range of $100… Dan Amoss: high oil and gasoline prices are here to stay
  • Beyond the sensational headlines about exploding watermelons in China

  Spending the day in transit from Laos to Cambodia, we were forced to spend our time with more alternative pursuits.

This video, courtesy of our Technology Profits Confidential editor Ray Blanco, makes more sense of the debt debate in Washington in two minutes and 33 seconds than an entire week of Hardball.

  Funny, this morning, we learned, too, China's been a net seller of U.S. Treasuries for five straight months.

The drop in March was the biggest since last November.

Last month Yu Yongding, a former adviser to the Chinese central bank, said China should stop buying Treasuries because the United States could one day default.

Perhaps readers of The 5 should begin forwarding the above video to their congressman or woman to find out why.

  Not that this news has stirred the bond vigilantes this week. A 10-year Treasury note yields 3.14% this morning — a five-month low.

  Here's another reason for the Chinese to lose confidence. Remember the "hard won" budget deal last month that averted a government shutdown? You know, the one we were told included "the biggest domestic spending cut in U.S. history?"

Yeah, not so much. According to new figures from the Congressional Budget Office, the deal will actually cost Uncle Sam $3.2 billion more over the next several months.

That's because the deal includes both $4.4 billion in cuts to domestic programs… and a $7.5 billion increase for the military.

The CBO says the deal does ultimately save $122 billion over a 10-year span… provided that future presidents and Congresses abide by the terms of the deal.

Heh.

  After we pooh-poohed the idea yesterday of the Treasury selling its gold stash to pay the bills… we see our friend Rep. Ron Paul thinks it's not such a bad idea after all.

It would be "a good and moral decision," he tells The New York Sun. "An individual would have to do the same."

"The gold at Ft. Knox and the N.Y. Fed is the most liquid asset the government has," says Dr. Paul's one-time aide Lew Rockwell, "It would take longer to sell what else needs to be privatized, from federal lands to foreign military bases to the U.S. Capitol building.

"Gold in the hands of the people, rather than the bureaucrats! How great is that?"

  We might agree. But it seems more likely the Treasury would hand it over to a foreign government or bank as part of a complex swap arrangement to paper over someone's (their) insolvency.

Assuming that hasn't happened already.

  "Under no circumstances should the United States consider selling a single ounce of gold," says Lew Lehrman, who along with Dr. Paul were the only dissenters on President Reagan's Gold Commission in the early '80s. "We have all the grounding and the basis for the United States taking the lead in establishing the convertibility of the dollar today."

The "Minority Report" of the Gold Commission, written by Paul and endorsed by Lehrman, acquired an underground — even cult — following during the following three decades. We recently republished it — a joint project of Laissez Faire Books and the Ludwig von Mises Institute. You can get your own copy here.

  The greenback is treading water today, the dollar index sitting almost motionless at 75.3. As such, the "risk trade" is back on… if ever so hesitantly…

  • The Dow has recovered a smidge of yesterday's losses and is back above 12,500
  • Gold is within $3 of $1,500 again, and silver is back above $35
  • Crude is up 2.6% to $99.44.

  "High oil and gasoline prices are here to stay," asserts Strategic Short Report editor Dan Amoss. "We may see a correction in prices as the Fed pauses its QE operations.

"But keep in mind that the fed funds rate will likely stay near zero for another year or more; considering the mechanics of managing its $2.5 trillion balance sheet, even a tiny interest rate hike would require a rapid reduction in the money supply."

We interrupt here to remind you of what that balance sheet looks like on a chart…

"A rapid reduction isn't going to happen as long as Bernanke is Fed Chairman, and as long as the U.S. Treasury is emitting new debt at a clip of $100 billion-plus per month.

"Even worse for gasoline buyers, Bernanke in his inaugural press conference seemed adamant that emerging market economic growth — not the Fed's QE — is driving gas prices up. So in Bernanke's mind, another round of QE would not light another fire under commodity prices."

  No sooner did we leave China than a bizarre story exploded…

No, China did not innovate the "self-opening watermelon" on purpose

According to state-run CCTV, farmers in Jiangsu province there have been busy this spring applying a growth-stimulating chemical to their crops.

Then came a hard rainfall. The water mixed with the chemicals, and… kaboom.

"On May 7, I came out and counted 80, but by the afternoon it was 100," said one farmer. "Two days later, I didn't bother to count anymore."

Western media have been quick to hop on this as another Chinese "food safety crisis" — like tainted pork or melamine-laced baby formula. The problem "underscores China's recent troubles with the unregulated use of chemicals in the nation's food supply," says one breathless account.

The reality is more prosaic: Farmers were applying the chemicals too early in the growing cycle, according to Wang Liangju, a professor at Nanjing Agricultural University.

In other words, it's ignorance, not negligence. We're confident the farmers will learn from their mistakes soon enough without new regulations.

  "Wouldn't the open interest in silver futures in China go down a lot from the changes in the margin calls?" a reader inquires after Monday's issue. "Isn't that largely what caused silver to drop so dramatically?

"Do you think they went in tandem because of JP Morgan changing the margin call rules via the CME after investors had purchased futures? Just curious if I am the only one who thinks that could be the case."

The 5: Well, the Shanghai Gold Exchange has already lowered its margin requirements twice since last Friday, from 19% to 15% — back to where they were on May 5. The CME has not followed suit.

Whether that's helped put a floor under silver, it's too soon to say… but since those moves, the spot price in New York has yet to sink to the $32.25 low reached last week.

Meanwhile, today's the day 1-kilo gold futures started trading on the Hong Kong Mercantile Exchange. No longer are the metals markets about New York and London.

  "Why is it we never hear about two excellent alternatives to conventional fuel sources?" a reader inquires.

"Jatropha bushes provide 1 gallon/year/bush of oil that only needs to be pressed and is then ready to use. It grows on soil that is useless for most other plants; is toxic to animals; is not a food source; can be grown very close together; and, if 5-10 million acres of it could be grown, could supply all diesel needs.

"Thorium is very plentiful, safe, you can burn up used radioactive uranium fuel rods, cannot make weapons with it. You can convert traditional reactors into these easily. India is currently building a 300MW plant and also has planted hundreds of thousands of acres of jatropha.

"Why are we not… and please mention them occasionally in your letters."

The 5: We haven't mentioned jatropha in a couple of years. But there's not much shaking with it yet. We see that Air New Zealand and a handful of other smallish airlines have been trying it out in a biofuel blend, but it's early yet.

As for thorium, the last we mentioned it was May 6 — you miss a day, you miss a lot. Patrick Cox has been all over thorium for years. In fact, it's one of those transformational technologies he thinks will change the world and build entire new fortunes — maybe even your own.

 "Nobody seems to notice the arrest of IMF chief Dominique Strauss-Kahn is most probably just a setup," writes a reader, "as it was with Eliot Spitzer at the time. Something is going on behind the scenes at top level — not that I am a fan of DSK or any other important official of these clubs.

"Also, nobody seems to notice that the new hot candidate as ECB president, Mario Draghi, was responsible at Goldman Sachs for Europe (as director for European affairs) during the fraud set up between Goldman and Greece. The guy who was responsible for this mess is going to run the show now. You cannot make this one up."

The 5: We're agnostic on Strauss-Kahn, but yes, Draghi has a bit of baggage. Last week, the European Union statistics agency shed new light on the Goldman-Greece connection.

Goldman helped the Greek government execute 13 currency swaps in 2001. The objective: to paper over Greece's rotten fiscal condition so it could qualify for EU membership.

Mission accomplished.

 "Thanks for your daily dose of reality," a reader adds. "Your content continually reminds me of Lily Tomlin's quote: 'No matter how cynical you get, it is impossible to keep up.'

"Keep up the good work!"

 "I love the way you write," says one more. "It's authentic, honest and readable."

The 5: Two compliments in one day… you're making us nervous.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Trying to keep up with travel and The 5… we haven't even finished our thoughts on China, let alone Laos or now Cambodia. Stay tuned for more!

rspertzel

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