In a Bloomberg article from Monday the 18th, People’s Bank of China governor Zhou Xiaochuan stated that China NEEDS TO REDUCE ITS FOREIGN-EXCHANGE RESERVES as they are in excess of the level the nation requires.
China is the not-so-proud owner of about $900 Billion in U.S. Treasuries. The total of their foreign-exchange holdings topped $3 Trillion USD in March, so when China is now forced to liquidate some of its foreign-exchange holdings, it goes without saying that the U.S. Dollar will be a large portion of this liquidation. Zhou is warning the United States that it will no longer be buyers but sellers of U.S. Dollar denominated assets.
In economic terms, the value of something goes down when supply increases or when demand decreases. China’s dumping U.S. Treasuries will INCREASE the supply while our massive $14+ Trillion dollar debt will DECREASE DEMAND. Uh, oh…that’s a double whammy for the U.S. Dollar. Hold on, folks! This is going to be a nasty ride—a really nasty ride as our once- viable currency fades into the sunset.
Additionally, S&P downgraded the future outlook of the U.S. Treasury to NEGATIVE from STABLE. THIS IS A WATERSHED EVENT, possibly the most important event in decades, yet the U.S. consumer and investor didn’t care. U.S. Bonds rallied after an initial decline on this downgrade while the U.S. Dollar soared after an initial decline. Why? Because there is something more immediate on people’s minds: the collapse of the Euro.
The European Union as a political entity and its currency, the Euro, are on some very thin ice. A European debt default fear actually dwarfed the worst news event in decades. WOW! What a world we are living in. This is nasty news—economically devastating news, but there is hope. Gold and silver are soaring. I mean really soaring! There is hope for your investments in a world of bad news; you just need to make sure you are properly allocated to ride out this storm. God bless you!
