Bill Bonner

China says it is continuing to buy US bonds “every day.” It doesn’t have much choice. It earns money by selling things abroad. In fact, exports in February were up more than 40% over February ’09. This leaves it with a lot of foreign money – most of it in dollars. What can it do with so much money?

China has quietly bought stakes in America’s leading companies…and in various businesses all over the world. But the only way large amounts of US dollar cash can be readily and safely deployed is in US bonds.

That said, China could also cause one helluva problem for the US if it ever chose to do anything else.

No worries on that score, said the Chinese official in charge of its $2.4 trillion worth of foreign reserves. He says China’s holdings of US debt are normal and that there is no intention of reducing them or playing politics with them.

He surely means it. And when the dollar goes down…and when the market turns, and China feels compelled to get rid of its US bonds, he’ll be totally sincere when he explains that to the international financial press too.

Markets make opinions, as they say on Wall Street. The market in bonds and the dollar has been very good for a very long time – since 1983, to be exact. As a result nearly everyone – including the Chinese – are of the opinion that US bonds are a safe place to be. When the market changes, so will opinions.

So far, no problem. But there’s no telling how long the foreigners will continue to support the dollar. Then what? Well…it leaves quantitative easing…in which the US central bank lends the money itself. Where does it get the money? It just invents it.

Which is why you can’t trust paper money. You have a dollar. You have it. You hold it. And you expect to keep it ’til death do you part. But then, along comes another dollar that looks just like it…fresh…young…full of vim and vigor. So why not? Everybody does it.

Pretty soon, there are a lot more dollars running around. And they change hands fast. In economists’ lingo, the velocity of money goes up…and the value of the dollar – like a faithless lover – goes down.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Dean

    Oh and those lovely new dollars just make you want more and more of them until you start drooling over the size of the stimulas and then the public catches on that there is so much easy money floating around and that old dollar that you used to hold so dear becomes jealous and doesn’t give you the same thrills as it once did. Then people start drawing parallels with Tiger Woods since no one really cares about Bretton Woods anymore. Um, i wonder if i can get my social security paid out in Yuan.?

  • CommonCents

    What’s a China with 2.4 trillion in foreign reserve to do? Of course they are going to talk up their biggest cash investment. Talk is cheap, I’d keep my eye on whether they reinvest it short or long term treasuries or elsewhere.

    I’d keep my eye on their foreign purchases of resources either direct purchase of commodities and/or foreign ownership of resource mining operations. I’d keep my eye on their accumulation of precious metals and oil. No one grows like China without bumps in the road, but they seem like they have learned a thing or two from other countries mistakes while they are on the upswing. In this country we are repeating the mistakes that all through time have failed. The ego.

  • jdeware

    The USA needs right now a strong president.
    One that passes bill with or without consent.
    Why is it that american people don’t understand that a few bearded guy running ammok the desert is not as dangerous as a group of lobbyist walking quietly into congress men’s offices to lobby for their paycheck.

    If Obama can’t put this country back on track, then I think it’s time for the world to stop being delisional about the USA and start short-selling it.

    in 10 years this country went from being a model to follow to a slump.I think the worst problem is the overconfidence of the American people.Maybe an occupation by a foreign country wouldn’t be too bad after all, it worked for France, for Germany, for Japan, for Korea…

  • pyoung

    The Chinese government’s $2.4 trillion worth of foreign reserves basically is savings from small and big Chinese business’s export earnings and they are temporarily deposited into their local banks waiting for other uses or investment opportunities. For these banks to make some money with the deposits, it is put into US treasury notes and bonds, etc. But once the Chinese depositors lost faith with the US investment, wouldn’t they withdraw and cash them out and invest the fund on other more secured instrument. My point is the fund does not belong to the government since it does not earned it. Am I wrong??

  • Pingback: bcHGc6SoQZ bcHGc6SoQZ

Recent Articles

The US Debt Crisis that Will Never Happen

Chris Mayer

One of the most heated political battles raging across the western world is debt versus austerity. In the U.S. this debate reached it's apex in 2011 when the U.S. credit rating was downgraded by Standard and Poor's. In today's essay, however, Chris Mayer throws the debate out the window, explaining why he thinks a U.S. debt crisis will never happen...


3 Tips to Finding Small Companies With Huge Potential

Matthew Milner

Believe it or not, more capital for a company doesn't necessarily mean better returns for investors. In fact, in a recent study that dug through data from more than 200 acquisitions going back to 2006, they found a "sweet spot" for the most likely acquisition targets. And it's lower than you think. Matthew Milner explains...


Disruptive Innovation Will Change How You View Obamacare

Greg Beato

The Affordable Care Act dumped 2,000 pages of regulations into the health care sector, stifling any innovation that could have brought about real cost savings. But even with these obstacles, there are still people looking for ways to do things better and at a lower cost. These new technologies could be the key to fixing health care in America...


Why Old-School Tech Stocks Are Beating Social Media

Greg Guenthner

While many of the newer social media stocks struggle for gains this year, old-school tech stocks have become some of the best trades on the market. With the rare exception (Facebook is doing well—shares are up 26% year-to-date) the social stocks are in the gutter. They got off to a fast start in January and Februray, but ran out of steam in the spring. Aside from a few feeble attempts, few have posted anything close to a noteworthy comeback. Twitter, LinkedIn, and Groupon are all down double-digits year-to-date. Groupon—the worst performer on this short list—is down 47%. On the other had, the biggest of the big tech stocks on the market are helping traders pile up even larger gains right now. Greg Guenthner explains…


Video
Creditism and the Threat of a New Depression

Richard Duncan

In the 1960s, total credit in the U.S. broke the one trillion dollar mark...and since then, it has expanded over 50 times. But now, as Richard Duncan explains, the explosion of credit that's made America prosperous, threatens to take the entire economy down. And that could mean the return of another depression...