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Monday, April 25, 2011

China no longer interested in underwriting Washington/Federal Reserve's free spending ways

China's Central Banker: We Own Too Much U.S. Debt

(The New American) -- by Thomas R. Eddlem --

China's Central Bank Chairman Zhou Xiaochuan told a Chinese monetary conference last week that “Foreign-exchange reserves have exceeded the reasonable level that our country actually needs,” which is essentially code for China won't be buying U.S. government debt any more. China's foreign currency reserves exceeded $3 trillion at the end of March, more than $1 trillion of which is U.S. government debt.

The limit on America's national credit card may have been reached.

Other Chinese officials expressed the opinion that China should sell off much of their reserves. "The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars," the Chinese government news service Xinhua reported April 23, attributing it to Tang Shuangning, chairman of the government's multi-billion dollar investment group China Everbright Group. China's central bank has purchased foreign currency and tightened up on domestic lending practices in recent years in order to control domestic inflation.

It's difficult to underestimate the economic impact of the end of Chinese purchase of U.S. debt. The loose money policies of the Federal Reserve, which include near-zero interest rates and "quantitative easing" of the purchase of $600 billion in U.S. government debt securities, have inflated the amount of money in circulation dramatically since 2008. With more dollars chasing a static amount of goods, it's only a matter of time before prices rise (or, more appropriately, the dollar falls) proportionately. The Chinese purchase of U.S. dollars served as a strong, though temporary, hedge against U.S. price inflation by taking dollars out of domestic U.S. circulation.

Even if the Chinese don't plan to stop buying U.S. Treasuries, U.S. consumers will likely endure moderate to severe price inflation. Indeed, Americans are already getting their first taste of the coming wave of price inflation. Most Americans are aware that the price of gasoline has skyrocketed in recent months, despite no interruption in supply or major spike in market demand for oil. Oil is not alone. All of the major commodities indexes are up 30-40 percent over the past year. Gold passed $1,500 per ounce last week, and silver has increased from $9 to $47 per ounce since 2008. Other commodities, from corn to wheat, have all seen bull markets against the dollar over the past year...MORE...LINK

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