An American professor in China and I have an argument. Of course, he can’t read my blog since the Chinese government has me censored there because they don’t want people to know what I know. HAHAHA. As the IMF and WB join the G7 leaders in trying, yet again, to restart the Japanese carry trade and to flood the world yet one more time with a flood of easy lending, it is time to look at the Chinese plans. They are buying gold! And working with OPEC to control world oil prices!!!! WOW. I know the G7 leaders are in hysterics about both. They hope to prevent this from happening. They fear the reimposition of the gold standard.
The nation increased its reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu said in an interview with the Xinhua News Agency today. The amount is more than Switzerland’s 1,040 tons, World Gold Council data show, and is worth $31 billion at current prices.
So, the sudden rise in gold prices was most likely due to the Chinese government.
China has the world’s largest foreign exchange reserves at $1.95 trillion as of March 31, according to state administration data. The holdings have climbed about sixfold in the past six years as the country had record trade surpluses and inflows of foreign investment. Gold prices have almost tripled to more than $900 an ounce from $337.
Note that the Federal Reserve, which has to now go to the Treasury TALF for funds, didn’t squirrel away a dime of physical US coin nor hoarded gold. This is why, all these years, I call the Federal Reserve, neither federal nor has a real reserve.
“Chinese foreign-exchange reserves have absolutely exploded in the past few years,” said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. “We shouldn’t be surprised that they’re adding a lot of all asset classes. I don’t think they’re shifting away from U.S. dollars into gold.”
The number of economists who think the Chinese are not very smart are legion. Later in this story, we will read one of these people who is even teaching in China! His inability to understand the historic underpinnings of societies and economic systems is rather sad. China is not like the US at all, today. It is a sovereign wealth nation and thus, is on the opposite side of the table from the US. The US is a beggar nation that gets trade boons only so long as these lead to destroying the US financial and industrial position.
OPEC and 13 Asian countries urged greater oversight of oil and other commodity markets to prevent a surge in prices after the global economy recovers from the worst recession since World War II.
The price surge was engineered by US and UK offshore hedge funds. These same funds also noticed China buying gold so they bought gold, too.
Participants in a ministerial energy roundtable in Tokyo sought limits on positions in over-the-counter trades and said “excessive” oil-price movements are “undesirable,” according to a statement released after today’s meeting. They also called for “continuous” investments to boost energy supplies.
China’s leadership role is growing vaster and vaster, faster and faster. Far from being dislocated by the collapse of the global Japanese carry trade credit bubble, they were the very first country to fight with Japan over this flood of easy lending. Later in this article, I will talk about a very famous and once-rich clan who played the offshore pirate island Japanese carry trade and lost all their 50 years of accumulated wealth this way.
The Federal Reserve’s ONLY function is to keep price stability and to create jobs. Of course, it actually does neither. What it does is, make credit cheap or expensive. Of course, when the G7 encouraged Japan in its insane ZIRP system, the US was flooded with cheap credit. The Fed has these utterly fake inflation calculations that ignores real inflation.
Relying on these figures that are based on false research and false information inflows, the Fed then can ignore obvious bubbles. When stocks suddenly shoot upwards as they did from 1996-2000, the Fed will talk about ‘irrational exuberance’ and raise interest rates here in the US but this did nothing to the fundamentals of international monetary games. The Asian Currency Crisis was a warning shot.
Asia was flooded with cheap Japanese credit and all the nations doing business with Japan saw their own economies suddenly flooded with cheap credit. The value of property shot upwards. Funding new business ventures was laughably easy. Then, it reached an invisible limit and crashed in 1997. Then, this flood of money suddenly shifted and moved to the US.
The US, in turn, had its own ridiculous stock market bubble. During all this, the Bank of Japan changed another system: the FOREX holdings. From the beginning of the new fiat US dollar floating currency regime launched in 1971, all major trade nations held pretty much the same size FOREX money. This was pretty much a stable area until the Japanese ZIRP system was launched.
Suddenly, Japan’s FOREX holdings began to climb very rapidly. In less than 8 years, it was over 16 times bigger than the US holdings. After the bitter experience of the Asian Currency Crisis which hammered all of Japan’s trade partners, all of Asia began to imitate Japan in this matter. They quickly discovered a great wonder: their currencies were suddenly kept cheap against the dollar, facilitating trade with the US. The US, in turn, was suddenly flooded with imports.
The US trade deficit went from under $70 billion to over $700 billion in less than 5 years! The Federal Reserve could see a credit bubble from a million miles away. But instead of showing alarm, they enabled this bubble. All bubbles ARE credit bubbles, after all. You can’t get intense, sudden inflation in tulip bulbs, stocks in the South Sea or US housing market if there isn’t a flood of easy credit which encourages the bidding up of such trifles.
The US Fed should, if it wished to be the restrictor of credit bubbles, have taken strong measures including going to Congress and demanding ‘free trade’ be terminated as a failure. No one did this, of course. Nor did the Fed grow its own FOREX holdings IN OTHER CURRENCIES during all this. The US held $2o billion in yen in 1996 and $20 billion yen in 2007. So, while Japan collected a trillion US dollars, the Fed collected not so much as a single yen.
All of this flooded the pirate coves with easy credit and they spent it, bidding up the price of nearly everything on earth, all commodities as well as all property and all corporations were ‘bought out’ by these pirates who simply transfered excess Japanese lending from Japan into all other systems. The search for something that wasn’t already bid to the moon was getting harder and harder to do as this flood of easy credit swamped all systems.
The Federal Reserve, instead of building reserves to soak up this easy credit [buying yen and thus, forcing up its value] instead, raised interest rates. So, from 2005-2007, US interest rates shot up which MADE THE JAPANESE CARRY TRADE MUCH WORSE. The differential between Fed rates and Japanese rates became a yawning chasm, encouraging more lending, not less lending.
This is why, from 2005-2007, world property and stocks shot through the roof. If the Fed was really doing its job, tracking INTERNATIONAL finances, it would have noticed what I noticed back in 1999 and begun forcing the yen upwards in value via holding yen in their vaults. Instead, they deliberately ignored all of this just like the Treasury also ignored this perilous business.
To this day, I notice that an army of economic ‘experts’ NEVER mention this business. Indeed, when I used to dispute with them in the past, they told me, I was crazy, worrying about the Japanese FOREX holdings shooting up in value. Because of this vast blind-spot in the economic pundit community, we fell into a deep well which we can’t escape: the collapse of an easy credit regime.
This is why everyone is howling for a return of the Japanese carry trade business. This is why governments are providing easy credit in the hopes, this will replace that flood of ridiculous lending that created the bubbles in the first place. So, far from trying to control credit, they want to regain what they view as, a wonderful system, a great way of running global finances and world trade. Here is an example of how these guys think, from a US professor teaching in China:
Michael Pettis is a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, and a Senior Associate at the Carnegie Endowment for International Peace.
On the other hand a different group of policymakers and power brokers – who include, I think, the Ministry of Commerce, the important exporter constituencies, and above all the powerful provincial and municipal leaders – are much more concerned with enacting measures that immediately address the expected rise of unemployment in the short term.These measures include pouring money into investment – mainly into infrastructure and the SOEs – and of course the huge increase in bank lending. They often point out that these policies saved China after the 1997-98 crisis, and so can save China again.
As an aside, and without wanting to take the 1930s analogy too far, this debate in China is a little like the split in the 1930s between the internationalists in the US who favored hard money (incorrectly, I think) and a rapid liquidation of overcapacity (painful but probably correct), and who vehemently opposed measures, including tariffs and competitive devaluations, to boost employment via boosting the export of overcapacity, versus the large and powerful constituencies, dominated by local congressmen, miners, farmers and many industrialists, who stressed immediate moves to weaken the currency, boost production, and resolve US unemployment even at the expense of the global system. In part because the 1929 stock market collapse thoroughly discredited bankers and economists, and in part because politicians are always more likely to be influenced by large domestic constituencies than by internationalists, the latter group pretty resoundingly won the debate, at least in the early part of the crisis, and clearly not to the US’s obvious benefit.
Although the debate is much less transparent in China today than it was in the US in the early 1930s, I think the latter group – the domestic constituency and provincial leaders – is once again winning the debate, at least for now. It is probably no surprise to regular readers of my blog that I largely disagree with this camp, and the main reason I didn’t want to forecast very low 2009 GDP growth numbers with much confidence is because I doubt the former group will win the debate. As I see it, the massive expansion in credit and investment we are experiencing is simply more of the same set of policies that, especially over the past five years, have pushed China ever deeper into the Asian development model, and to the extent that they are successful they will keep pushing China, which I think of as exemplifying the Asian development model on steroids, in the same direction. Beijing, in other words, is increasing the dosage of steroids. (I think I am mixing metaphors all over the place.)
The reason I think this is a mistaken strategy is because I would argue that the Asian development strategy is dead, and over the next three to five years it will become increasingly evident that 2008 was the year it died. I may be wrong, of course because it is doubtful but not inconceivable that the great consumption party in the US can resume for a few more years. It would not be the first time that what seemed like an unstoppable correction in the trade imbalances was interrupted. To a certain extent we already saw a dress rehearsal for this event in the 1987 crash, around which time the US trade deficit, which had risen to around 3.5% of GDP the year before (a level which seemed unimaginably high at the time), began its inexorable reversion, to the point where the US achieved a small surplus in the early 1990s….The period during and after the 1987 crash more or less marked the end of that stage of the Japanese miracle, although by then Japan was so caught up in the monetary expansion that had begun with the automatic monetizing of its massive trade surplus with the US in the early 1980s, that an internal bubble kept the local party going for another 2-3 years before it, too, finally ended, and ended disastrously – although many people, especially here in China believe, mistakenly in my opinion, that the bubble was set off by the Plaza Accord.
But the Asian development model didn’t really die then (although the temporary shift in US consumption may have created the serious dislocations that helped lead to the 1997 crisis). At the time the US was itself caught up in great productivity and liquidity growth cycles that kept the model alive by causing a surge in US growth and, later, an even more rapid surge in US consumption.
Dear Prof. Pettis,
My father was one of the very, very first US intellectuals to go to China when Madame Mao still ran the show. My family has been very involved with developing China. I was one of the earlier teachers of how finances, banking and capitalism works in tandem with historical processes.
The Chinese, since 1982, have hired a large number of people like you to teach them more stuff. You must realize, even though they are milking you for information, they see very clearly, your weaknesses.
One area you seem unable to understand is the logic of historical forces: any nation, during a global contraction following a global credit bubble bursting, MUST defend ITSELF from the crash with any means possible.
They do NOT save the entire planet. THIS IS IMPOSSIBLE. They must save their own governments from the collapse. This means doing things that get theorists very angry. For example, the ONLY thing the US could do when the European borrowing spree from 1914-1929 collapsed into repeat bankruptcies of major manufacturing giants [GERMANY]—the US could not allow all of Europe [GERMANY] to flood us with their exports.
We had to protect ourselves. This is why barriers shot upwards. They had to do this. After the US system broke down when we hit the US Hubbert Oil Peak in 1974, we fixed this collapse of our currency and our system by pushing for ‘free trade’ which destroyed our industrial base, warped our domestic economy totally out of kilter, drove up our public and private debts and on top of all this, created the hideous monster that is destroying global finances today: the interest rate OTC derivatives trade.
This monster grew from one billion dollars in 1982 to $600 TRILLION today. This is, by far and away, the biggest financial bubble ever seen in human history. And the toxic fuel, the oxygen that caused this thing to go from $30 trillion to $600 trillion was the ZIRP Japanese carry trade.
Which ended on 7/17/7. This is why the corrupt bankers where all howling about ‘no liquidity’ starting back then. Every part of every system was heavily leveraged by Japanese carry trade liquidity.
I am not teaching in your school in China because the Chinese government and I had a huge blow-out in 1989 when I got amnesty for all Chinese students studying in America that year. It was an epic battle! And I won so they told me, I can never be published in China or teach Chinese students.
Well….you are! I suggest you put your money where your mouth is and teach a class on the Tiananmen Square massacre. Explain to the students, how the Chinese in America gathered in front of the UN and camped there for a month. And how we forced President Bush to give them amnesty. I assure you, the Chinese will fire you and march you off campus.
It would be a most excellent lesson for everyone. I will support you when you hold your press conference. And do accuse the US government with COMPLICITY with the Chinese communist dictators. Our government conspired to move most US industries to China via the ‘free trade’ scam.
Thanks in advance, Elaine Meinel Supkis
Below is Professor Pettis’ reply:
Elaine, I have too many disagreements with your interpretations of both US and Chinese history, and especially the accompanying conspiracy theories, to go into them in any reasonable detail, but I do want to dispute your characterization of the “Chinese” as having hired me to milk me for information while clearly seeing my weaknesses. First of all the “Chinese” didn’t hire me – it was the Vice Dean of the school who did, and he decided to do so after a single lunch meeting, presumably without having had time to contact Zhong Nan Hai. Perhaps they do know all my weaknesses, and of course you may know the people at the Guanghua School and their motivations much better than me, but I am pretty sure they hired me for very much the same reason that my former school, Columbia University, has hired a number of Chinese scholars to teach there – because they believe that having different professors with a variety of experiences, knowledge and viewpoints might enhance the learning process for the students and the prestige of the school. As long as they continue to be willing to have me teach here I hope to be able to continue teaching some of the extraordinary students here that I have met.
Note that this professor evades all of my points. He thinks I am some sort of conspiracy kook and not someone who actually lived, day and night, with some of China’s communist leaders. Of course, he also is so naive, he can’t even begin to fathom how the system really works.
That is, the Chinese are very CURIOUS about what we think and how we think so they can OUTWIT us! Most of this poor man’s students will not be part of the Communist leadership, virtually none will. But the possible one or two students who do join the politbureau will become privy to the 50 Year Plan and will then understand the historical forces and the system of thinking that plans to drown the US in too much easy credit while at the same time, destroying our industrial base.
The Chinese are NOT ‘milking’ this guy for his ‘information’. They are STUDYING him to see if he has figured them out. Obviously, he hasn’t and he can’t due to his internal hubris. Many Americans think, they are beloved while they teach. But these are YOUNG PEOPLE who then, go on to other things and learn new lessons and they incorporate all of this into their new way of viewing the world. The professor is merely a page in this book.
For example, he teaches the same garbage all our economic graduates are taught. Namely, the Great Depression was bad in the US because we protected our own industries via trade barriers. If only we didn’t do this, they all wail! Bernanke, one of the stupidest historians on earth, subscribes to this lunatic reading of economic history. He thinks, if only the US had increased credit via the Fed, why, there would have been no Great Depression!
The US came out of the Great Depression as one of the few nations on earth with CREDIT. During WWII, we used our credit as the basis for our bond markets which funded the entire Alliance in WWII. Just as our credit funded half of WWI. And most of post-WWI war payments!
At the end of the Great Depression, we had one of the world’s biggest industrial systems! Which was able to flood the entire planet with war materials, we built entire navies, ten times over. The Germans and Japanese couldn’t sink our ships faster than we churned them out! Every plane they shot down was replaced with ten planes!
Today, we have hardly any systems we can convert to war goods output. Our factories have been either removed entirely or are owned by trade rivals. The easy lending solution to this present Great Depression has, since 2000, increased our debts while building NO new industries here! Quite the contrary!
The Chinese leadership knows all this. They know the books about the Great Depression written by economists are deeply flawed in this matter. They know the dangers of using only easy credit to prevent a trade collapse and how this will endanger China. This is why it was China, not the US, which forced the yen to appreciate in value in July, 2007, right when the Japanese literally threatened China with a flood of cheap credit via the Bank of Japan!
The US economists are very big on teaching math formulas. The Chinese love this. They want as much of this as possible. They then use the ideology of the Chinese thinking systems to apply these formulas to DIFFERENT ENDS not understood by arrogant US economists and political leaders all of whom have been brainwashed by 60 years of misguided Great Depression Keynesian ideology.
Robert Pfeiffer, a partner at Compass Advisers, a mergers and acquisitions firm, said that businesses such as his did not need to be based in Britain. “We all love living in London but in the end it becomes an economic decision. The clients don’t care.” He and his partners were discussing a move to Geneva. “Do we want the hassle of moving? Probably not. But there comes a point economically when it’s hard to justify being here.” And Philip Lambert, chief executive of Lambert Energy, said his consultancy was “seriously considering” relocating abroad, saying the state had “total hostility or apathy towards entrepreneurs”. Dozens of Britain’s best-known business figures have condemned the new tax grab. Sir Richard Branson said it was a “block to the next wave of entrepreneurs”. Tim Waterstone, founder of the Waterstone’s bookshop chain, slammed the tax as a “disincentive to entrepreneurs”. Stanley Fink, the former chief executive of the Man Group hedge fund, said: “Nobody believes that 50 per cent is a natural stopping point. There’s nothing to say for the richest it won’t go to 60 per cent, say for those earning over £200,000. “There will be some successful entrepreneurs who decide to move to Switzerland or Ireland. I’m aware of one or two people who made active plans to decamp when Labour announced 45 per cent and will put those plans in motion.”
HAHAHA. The gnomes are pissed off. See? They need their bonuses so they can have sex and fast cars, jets and yachts. They see all our governments going bankrupt and don’t care. They are not patriots or even nice people. They think of only #1, themselves. This is why protecting and helping them is utterly useless.
This is also why I say, the US navy that is bankrupting us should go after REAL pirates and raid these various islands and seize these guys’ wealth. Oh my! I bet poor professor Pettis would say, this is communist! HAHAHA. Yup. And who, pray tell, is taking over the planet?
To bank employees monitoring the hedge fund’s collapse, the e-mailed instructions were emphatic. “No securities, or cash, FOR ANY REASON are allowed to be sent out from JP Morgan.” At issue that morning last November were the accounts of Parkcentral Global Hub Ltd., a Bermuda-chartered fund run from Plano and Dallas by the Perot family, one of the richest families in the world. J.P. Morgan Chase & Co. was the fund’s banker and a trading partner. Securities markets everywhere were in free fall. And by Nov. 21, Global Hub’s assets had almost evaporated – down from nearly $2.5 billion months earlier. Days later, the Perot family shut down the fund and relinquished control to Bermuda liquidators. Court records show there may be about $266 million left for creditors, whose claims total more. J.P. Morgan says it alone is owed more than $700 million, according to a lawsuit in New York State Supreme Court.
Ross Perot ran for President talking about the ‘giant sucking sound’ of NAFTA. HAHAHA. Then, tried to get rich off of the pirate system. So his clan did the usual treasonous gnome stuff: hiding wealth offshore at pirate coves and then going to the Japanese carry trade to get easy credit so they could play games with funny money flooding the planet.
Now, like the NYT Flat Earth Friedman, they are all going broke! HAHAHA. This shows how humans operate once they get into the Cave of Wealth and Death. They usually are gleeful and rush around, trying to grab everything so they can be as rich as Croesus .
So we can now wave goodbye to another super-rich clan from Texas. I wonder if they will figure out how their own greed sank their own Titanic economic yacht. I doubt it, of course. History is a very stern teacher. She will lash us with whips over and over until we finally learn our lessons. And we are very perverse because we do NOT want to learn lessons. We want wealth and power and this is why we refuse to notice the bones littering the entrance of the Cave of Wealth and Death and why we refuse to understand the dangers of zero and the weaknesses of all our magic formulas and how teaching false lessons leads to misunderstanding the essential forces at work in the real world.
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