The big story in the financial markets this week was news that China might be reducing or halting the amount of U.S. treasuries it buys going forward.
It’s no secret that the financial condition of the U.S. government and U.S. dollar have seen better days. In the past 20 years the amount of debt used to finance the government has exploded, while the Federal Reserve has increased the money supply to levels that are historically unprecedented.
The result is that foreign counterparties and participants in the financial markets have slowly begun to notice. For months news has been surfacing about the PetroYuan as an alternative to the petrodollar. Now China appears ready to take things even a step further.
The problem for the U.S. government is that if China stops buying the debt at the same time the Federal Reserve is supposedly stepping away from the auction as well, who is going to buy all those bonds?
As for why China might be considering such an action, it’s hard to imagine that the U.S. government’s largest creditor is thrilled when they can’t even see the faintest hint of fiscal responsibility.
Additionally, the Fed is publishing essays about negative interest rates. Which can be translated as more printed money. Meaning that even if China ever does get repaid on its loans, they will be receiving money that is worth less due to the increased supply of dollars.
It’s hardly an ideal arrangement. And this is why people keep talking about gold and silver, while they also buy cryptos.
Especially as news continues to filter out this year about some of the nefarious activities that government officials have been caught engaged in, the trend away from the dollar is likely to continue, if not accelerate. Which is why there is such great value in diversifying out of U.S. dollar-based assets.
It’s unfortunate that the political elite have pushed the situation to this extreme extent. Yet it’s wise to take notice of what China is doing with its money, and factor that into your investment strategy appropriately.
January 11, 2017