Chinese Whispers and Power Plays

Chinese Whispers and Power Plays
  • Elitist agenda always the same
  • China’s thinly veiled threat
  • How to cripple the US economy…

Ah, Davos.

A word we’ve all heard, but don’t truly understand what it’s about.

Davos is where the World Economic Forum is held each year. It’s a tiny ski village hidden in the Swiss Alps.

Given its locale, it’s the most prestige one of its kind.

All the movers and shakers are there.

It’s super fancy, full of super elites — just not the faces you’re used to.

Rather than have a head of state attend, countries will either send their most diplomatic servant employee…or someone who isn’t afraid to get their hands dirty behind closed doors…

The problem with Davos?

It’s full of people who are completely detached from real world problems.

Elitist agenda always the same

The funny thing about Davos is that the agenda never changes. Discuss ‘global’ events and improve the state of the world.

At least, that pretence.

Somehow this very selective group of people worth billions show up, pretending they can solve the world’s problems.

The only thing that changes is the topics, with this year’s on Brexit, trade tariffs and climate change.

And here’s the proof that Davos is a joke on the rest of us.

Sir David Attenborough kick-started the elitist event last Monday. Throughout his speech, Attenborough urged the audience to take climate change seriously.

Rather ironic that Attenborough was the opener. Apparently, 1,500 private jets landed at Zurich Airport this year. That’s up 200 on the private jets that landed last year.

According to one private jet service, the jets in use were ‘bigger and better’ than last year. Andy Christie, a director at private airline ACS said the reason for this is ‘business rivals not wanting to be seen to be outdone by one another’.

Private jets and the life of luxury aside, there can be useful information that flows out of Davos…

China’s thinly veiled threat

Normally the information that comes out of Davos doesn’t reveal much.

Run of the mill ‘let’s work together’ statements, the kind that make the elitists sound like they are doing something while simultaneously doing nothing.

Then, you get little tidbits — clues as to what’s really going on.

The US-China trade war may be last year’s news, but it’s still very much this year’s problem.

What started out with a tariff on solar panels imported from China, ended up with some US$250 billion worth of tit-for-tat tariff lobbying.

So much so, the two countries had almost reached the point of a flat 25% on almost all two-way trade.

That’s how hostile it was getting. So as a result, a truce was called for further negotiations.

China simply can’t out tariff the US. It doesn’t buy enough from America.

For months now, the consensus has been that China would simply devalue the yuan against the greenback to make up for the increased costs that the tariffs would add.

However, last week at Davos, we discovered that China has another ace up their sleeve.

The Vice Chairman of China Securities Regulatory Commission (CSRC), Fang Xinghai, sent an important hint to the market. He told the media he doesn’t think the Middle Kingdom ‘will in any way significantly reduce its investment into the US government bond market’.

Alone, the statement seems insignificant. In the context of the US-China trade war, it matters.

China reducing how many bonds it buys could cripple the US…and ultimately have catastrophic consequences for the global monetary system.

How to cripple the US economy…

Let me give you some background here.

Last year, Russia sold off 84% of all its US treasury bond investments.

Given Russia only ever kept US$100 billion of US treasuries on hand, it was hardly a big buyer. Yet, while Russia didn’t own a large amount of US debt, it has effectively ditched the US dollar as part of its foreign reserves.

China, on the other hand, is a big buyer of US debt.

The Middle Kingdom is currently sitting on US$1.13 trillion of US debt. Almost a third (29%) of all US treasury notes, bonds and bills are held outside of the US.

This debt pool is vital to the US, which needs US treasuries to be bought in order to run its enormous government debt.

The fact that the vice chairman of the CSRC brought up the purchase of US treasury bonds isn’t a coincidence.

What looks like an off-the-cuff comment from Xinghai could very well be a hint at China’s next step.

By buying less US bonds, China is essentially reducing the ‘demand’ for US dollars.

The less demand for US dollars means fewer greenbacks floating around in the financial system.

Because the US dollar is the epicentre of the financial world, America can run up enormous deficits because they know there is still a demand for US dollars.

Central banks and governments around the world buy US treasury bonds as part of their foreign reserves to protect themselves in a crisis.

And the more US bonds they buy, the more ‘money’ the Federal Reserve can print, essentially supporting the value of the US dollar.

In turn, the US government can keep running up their trillions of dollars in government debt, believing that everyone will always want US dollars.

It’s been this way for almost 40 years.

But there is a very real chance that this cycle is about to come to an abrupt halt.

If there is less demand for US dollars, the supply of greenbacks will shrink.

Given that there is no other dominant currency to replace the US dollar, a drop in greenbacks is an enormous problem.

The trade war is about to get much worse.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia