And Then What?
June 9-10, 2007
Los Angeles, California
by Kate "Short Fuse" Incontrera
A recent study by Swiss bank USB AG found that more than two-thirds of central banks worldwide would rather diversify their foreign currency reserves with bonds, rather than U.S. treasuries.
UBS’s survey shows that "central banks, led by China’s, held $5.7 trillion in reserves. Assets from oil exporting countries that are invested like reserves add up to another $2.5 trillion."
There has been much speculation and concern that China would spread its $1.2 trillion in reserves away from the United States, but as the poll found, "it is likely that central banks will diversify within dollar-denominated assets, rather than divest from the U.S. currency all together."
"People get very confused on this subject," Warren Buffett explained to us, when we interviewed him in Omaha a few months ago.
"’What happens if the Chinese dump their government bonds?’ [people wonder]. The Chinese – or any other country – cannot dump U.S. government bonds and sell them, and have some terribly depressing effect on the United States, because in exchange they’ll get dollars – and what do they do with those dollars? They put them in banks or something of the sort. They buy stocks with them. They buy real estate.
"So, it’s exactly like saying, ‘If I’ve got a billion dollars worth of government bonds, and I want to sell ’em, well, I’ll get a billion dollars worth of cash and I’ve got to buy something else.’
"There’s a lot fallacious thinking…the most important thing [you] can ask after anything is described to you in economics is to say, ‘And then what?’ Because you can’t do one thing in economics. Anything you do peruses another corresponding action, so you have to say ‘And then what?’"
So, China has $1.2 trillion in reserves, and they are thinking, ‘What to do, what to do?’.
Why not invest a few billion of that in American companies? Well, China already tried that with the controversial Unocal bid – and was blocked on the grounds that the acquisition would pose a threat to national security.
Learning from that experience, China announced that would be investing $3 billion in an American firm that keeps much of its operations out of the public view: New York-based private equity firm the Blackstone Group LP.
The Chinese stake in Blackstone is just the first in what promises to be scores of these types of deals, predict many economists.
"Around the world, a secretive society is emerging of governments flush with foreign assets, some of them petrodollars, that are increasingly calling the shots in international finance," reports the May 24 edition of The Economist. "The Blackstone deal is likely to stir others to invest their money even farther away from prying eyes than they do already."
"Like China, whose proposed Blackstone stake is part of $300 billion that the government plans to set aside this year for investment purposes, dozens of countries have set up what are now commonly referred to as sovereign-wealth funds. They manage money drawn from reserves, natural-resource payments and the like. China is chiefly concerned to diversify its foreign reserves, but other sovereign-wealth funds own national, as well as international, assets."
These sovereign-wealth funds have many in the economic world worried. As they get larger and start to look like large hedge fund or mutual funds, "they will be harder for investors to track," reports William Pesek, writing for Bloomberg.com.
"It’s not clear how much data they will provide on holdings. As their massive funds are combined with private capital, government portfolio shifts could lead to unexpected and unexplainable moves in markets," he continues.
Despite the fears connected with lack of transparency, and concerns over financial globalization as a reaction to sovereign-wealth funds, it looks as though they are here to stay. In fact, Stephen Jen, London-based global head of currency research at Morgan Stanley, estimates they could grow as large as $12 trillion by 2015 – almost the same size as the U.S. economy.
You just need to ask yourself, dear reader, ‘And then what?’
The Daily Reckoning
P.S. You can’t open a newspaper or turn on the television without hearing about the booming Chinese economy – but does that make it a good place to invest right now? Yes, and no…you simply need to know where to look. That why we’ve dedicated this year’s Agora Financial Investment Symposium to that very topic: "Crisis and Opportunity in the New Asian Era."
— The Daily Reckoning Book of the Week —
China Shakes the World: A Titan’s Rise and Troubled Future – and the Challenge for America
by James Kynge
A former bureau chief of the Financial Times in Beijing, Kynge demonstrates how China’s thirst for jobs, raw materials, energy, and new markets–and its export of goods, workers, and investments–will dramatically reshape world trade and politics. China’s appetite, though unpremeditated and inarticulate, has become a source of major change in the world.
Napoleon said, "Let China sleep, for when she wakes, she will shake the world." In the early days of the twenty-first century, China has started shaking the world with its prowess in manufacturing. Not all is rosy, however, because China has serious problems with its environmental resources, severe pollution, and institutionalized corruption within the government, the legal system, the police force, and the media. The question Kynge offers answers to is how the world will cope with China’s extremes of both strength and weakness.
THIS WEEK in THE DAILY RECKONING: Ever wonder where the electricity that powers basically everything in your life comes from? Find out in Thursday’s issues, "Corridors of Power," below…
The Bubbles of a Global Market Hot Tub 06/08/07
by Bill Bonner
"The 21st century, meanwhile, is witnessing the first truly global financial bubble…and all over the planet, markets are bubbling up. All over the globe, people sit in them and sip champagne as if they were hot tubs in Santa Fe."
Corridors of Power 06/07/07
by Byron King
"Have you ever really stopped to think about where the electricity that powers your home…your office…basically everything in your life comes from? Neither did we…good thing we have Byron King to enlighten us. Read on…"
Another Inconvenient Truth 06/06/07
by Puru Saxena
"Let’s face it; our planet is facing an energy crisis. If nothing is done to reduce our dependence on crude oil, and if the human race is unable to find a viable alternative source of energy, the 1970’s oil-shocks will look like a picnic. Puru Saxena explores…"
Kuwait Breaks the Peg 06/05/07
by David Galland
"There are times, like today, that any reasonably astute observer can look to the horizon and see what’s coming. A monetary crisis is headed in our direction, and the pace of its arrival is, in our view, quickening. Casey Research’s David Galland explores…"
A Mouthful of Price Inflation 06/04/07
by The Mogambo Guru
"There are certain topics regarding today’s markets that are constantly talked about by investors and analysts alike. Among them are China, the usefulness of commodities, and dollar strength. However, there is only one who can discuss them while eating a double-grande burrito supreme. Read on…"
FLOTSAM AND JETSAM: James Kunstler recently attended the Telluride Film Festival, where the themes were global warming and peak oil…right up his alley. Read on…
We Want Solutions!
by James Howard Kunstler
Wherever the environmentally-informed gather these days, a nervous impatience often mounts, and ends up expressing itself as an outcry for "solutions." For example, at the Telluride Mountain Film Festival, where I happened to be this past weekend, along with a couple of hundred other people who spewed airplane exhaust across the stratosphere to get there. This year’s twin themes were Global Warming and Peak Oil.
Many frightening documentary films and Powerpoint talks were served up in the opening symposium (including ones by Dennis Dimick, the editor of National Geographic, Daniel Nocera of MIT, and yours truly) and, as the morning wore on, the audience grew visibly impatient, until one speaker dropped the word "solutions," and the audience gave out a big whoop of approbation.
It only made me more nervous, because this longing for "solutions," strikes me as a free-floating wish for magical rescue remedies, for techno-fixes that will allow us to make a hassle-free switch from fossil hydrocarbon power to something less likely to destroy the Earth’s ecosystems (and human civilization with it). And I think such a wish is, in itself, at the root of our problem — certainly at the bottom of our incapacity to think clearly about these things.
I said so, of course, which seemed to piss off a substantial number of my fellow festival attendees.
My position on this can be easily misunderstood. I don’t want civilization to collapse (I like Mozart and access to root canal). I don’t want Homo sapiens to go extinct, or the planet to parboil. I certainly don’t believe in doing nothing in the face of this emergency. But I also don’t believe we are going to make any hassle-free switch in the way we run things – or that we should want to. Would the USA be a better place if we could run Wal-Mart and Las Vegas on wind power? I don’t think so. Would the public benefit from another hundred years of suburban living – and an economy based largely on creating ever more of it? All the Prozac in the universe would not avail to offset the diminishing returns of that bulls—.
In my travels, I have noticed a disturbing theme among the educated minority of eco-advocates: they are every bit as dedicated to the status quo (in their own way) as the NASCAR morons and shopping mall developers. The eco-advocates want cars, too, and all the prerogatives (like free parking and country living) that go with them, just like the Wal-Mart shoppers. If this were not so, then why do the eco-advocates light up whenever somebody presents a snazzy new vehicle that runs on a fuel other than gasoline? Indeed, why are some of the eco-friendly pouring all their efforts into the invention of such things instead of into walkable communities and the reform of our stupid land-use laws?
I encountered this ethos most strikingly a few years back at Middlebury College in Vermont, where angry biodiesel advocates assailed my lack of enthusiasm for their particular "solution" — which seemed geared mainly to allow them to continue to drive their dad’s old cast-off SUVs to the snowboarding venues of that progressive little state. But the wish to keep running all our cars permeates what little public discussion there is of the global warming / energy crisis issues at all levels. Even the elder statesmen of the eco-movement talk it up incessantly. The first great victory will come when they shut up about it and put their minds to other tasks.
The eco-advocate community is still hooked into the Faustian bargain of technology with little consciousness of its diminishing returns, and to some extent have made themselves unwitting tools of the truly clueless and wicked who run business and politics in our land. With this particular group in Telluride, which was composed heavily of Boomer eco-adventurers (mountain climbers, trekkers, kayakers), the infatuation with ever-cooler adventuring techno-gear extended naturally, it seemed, to their uncritical view of magical techno-fixes aimed at "solving" the climate / oil mess.
And the setting of the festival — the Rocky Mountain ski resort town of Telluride — itself induced some eerie moments of reflex nausea as one contemplated the many 10,000 square-foot peeled-log dream palaces built by Hollywood producers, who derive their fortunes by selling violent masturbation fantasies to fourteen-year-olds. One couldn’t fail to notice that three-quarters of the storefronts along the little main street were occupied by real estate sales offices.
But I don’t want to be doubly or triply misunderstood as appearing to twang on the kind people who invited me there, or to evade the obvious fact that I went (by airplane and shuttle van). I thought it was worth going to carry this one little message: let’s stop talking about making better cars and start talking about occupying the landscape differently – which we’re going to have to do anyway.
Editor’s Note: Don’t forget – you can hear Mr. Kunstler (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is "Rim of Fire: Crisis & Opportunity in the New Asian Era" – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.
James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.
His latest nonfiction book, "The Long Emergency," describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.
You can get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog – at his Web site: