China Worried about US Debt - The making of a Powerhouse

Richard Fisher, head of the Federal Reserve Bank in Dallas, Texas – one of the US’s largest states – told a British Newspaper yesterday that the Chinese are incredibly concerned over the US governments handling of the financial crisis, specifically, the printing of money by way of the Federal Reserve buying US government bonds, treasury bills and notes. For those of you that don’t know this, when a government wants to increase its cash position, it “lends: itself money by buying up its own debt. I know most of wish we could do that, but if this were the case we would be bankrupt with houses stripped and cars repossessed and the rights to our firstborn taken as well.

This is yet another example of China showing they are worried. Did they come out and tell Ben Bernanke or Tim Geithner, the US Fed Chairman and Treasury Secretary? No. Did they send a letter to Vice President Biden or talk with Secretary of State Clinton? No, and Clinton was just there. Did they address the congressional delegation who came to visit them this week – a delegation that included the speaker of the US House of representatives Nancy Pelosi, AKA the third most powerful person in the US? No. What they did do was take a round about way to let people know they are unhappy with the status of their investment and the way in which the CEO is handling the company. By Company I mean, The US and by CEO I mean Obama.

The Chinese are in a difficult spot, and I have written along these lines before in my Online Forex Blog, you see if they cause a widespread panic in the markets by making such a fuss over this, the value of their investments go down even further. Widespread panic regarding a rating decrease last week showed what it could do, the Dollar fell hard. What would happen if the Chinese leadership addressed the US leadership on this issue directly – it would take away the air of hearsay that exists now through these drips and drabs of media reports.

The Chinese are able to get their message out this way, but not in a way that would cause so much of a stir. Who reads these little interviews aside fro ma few of us boring people with nothing more to do? Wen Jiao Bing calling Obama on the phone to say “yo, what ARE you doing?” will get front page attention on every major newspaper. This way the Chinese get to have their cake without it collapsing on them. The US gets the message. And, I am sure, the US does not care.

Culturally the US and Chinese mindset are worlds apart. The Chinese are savers and conservative by nature fiscally (they also are superstitious), the Americans are care free, “it’ll all work out” type of thinkers – there is no long term.. Hell, the Chinese emperors buried thousands of ceramic soldiers and preserved aspects of their legacy. In May of 2009 they are thinking of 2030, whereas the Americans in May of 2009 are thinking of June.

In the end the Chinese will emerge stronger – this is certain. It happened the same way for the US in 1914 when it was purchasing all the gold it could. China is now doing the same. And where the US became a global leader in the 40’s because of it, China will dominate later on in this Century. Hold on to your Yuan’s, they might be worth something some day.

Stress Test Results in Adding Just More Stress

Rumor has it that US Regulators have told the two largest US Banks, Citgroup and Bank of America, that the results of their "stress test" show that will require further capitalization. What this means in simple terms is that the banks are not ok - they have so much debt, bad debt at that, and they are in need of more money to help them stay afloat.

We all knew that Citigroup was a zombie bank, a bank that is dead, bankrupt, kaput, but is being sustained by the generosity of the US taxpayer (with the help of the Chinese treasury Bill holders, of course). But after the results of Treasury Secretary Tim Geithner's test on bank stability - aka The Stress Test - we are witnessing the fact that the US has no intention of following through on their plan to fix the banking sector. It was said that the results will determine the fate of the banks - if they show that they are in fact needy of further capitalization, the US would either systematically disassemble the banks in an orderly manner, or let them fail outright.

The problem is, when the plan was announced, if you remember, it was amidst much criticism that the US did not really have a plan - that they were being too soft on banks with severe problems for fear that their bankruptcy would cause a panic. So Geithner came out with the stress test idea and said that banks that do not pass, will be reorganized (A nice way of saying taken over). But now the outcome has changed - and it seems that the US banks that are at the heart of this whole credit mess will be getting more money to run their failing operations. It looks like the whole plan was to get these results out AFTER President Obama's first 100 days, the yardstick that sets the tone for the presidency.

Is it not ironic that these results were planned for Obama's 101st day?

Wednesday looks like it is shaping up to be a tough one for the US Dollar as risk appetite returns for a bit. I call it profit taking - it will be short lived.