Ambrose still bent on sustaining the unsustainable

Sabre rattling with talk of "aircraft carrier battle groups" is the gunboat diplomacy Ambrose has begun to allude to; several times he has hinted that the US should use its military might to force purchase of its debt.The UK will be cap in hand to the IMF before the year is out, imo..


Et tu Tokyo? If Washington is counting on Japan to act as last-resort buyer of US dollar bonds, it may have to think again. Masaharu Nakagawa, finance chief of the Democratic Party of Japan (DPJ), told the BBC that his country should not purchase any more US debt unless issued in yen as "Samurai" bonds, akin to "Carter bonds" in 1978.

This is the sort of petulance that tends to emerge in the late phase of slumps (1840s, early 1930s) when mass lay-offs provoke a populist backlash and hotheads run away with the agenda. Mr Nakagawa later played down the comments, calling them private thoughts, but the genie is out of the bottle.

We have come to assume that Japan under the Liberal Democratic Party (LDP) will always cleave to America, if only to safeguard US protection against Chinese naval expansion. Backed by Washington after the war as a rural counterweight to the urban left, the LDP has held an almost unbroken grip on power since 1955.

But crashes have a habit of bringing regime change. Brian Reading, a Japan veteran at Lombard Street Research, predicts a "seismic shock" over the next four months as voters rebel.

"With unemployment heading for 5 million by end-year, something must happen," he said.

The tremors from Japan follow near-weekly fulminations from Beijing, which suspects that Washington is engineering a stealth default on America's debt by the trickery of quantitative easing. This was put bluntly in February by Luo Ping, head of China's banking commission: "We hate you guys. Once you start issuing $1 trillion-$2 trillion, we know the dollar is going to depreciate." Premier Wen Jiabao picked up the theme more politely, asking whether the "massive amount of capital" lent to the US was still safe. Since then the People's Bank has floated ideas for a world currency.

China and Japan together hold 23pc of America's $6,369bn federal debt. This has caused alarm on the US talk radio circuit, but fears of imminent "dollardämmerung" and a collapse of American economic power may prove far off the mark. Who ultimately holds a gun to the head of whom?

If Asia's leaders give free rein to frustrations and crater the US bond market, they will ensure their own political destruction. Japan already risks descent into demographic death, deflation, and debt atrophy (its public debt is nearing 200pc of GDP). China's regime depends on perma-boom for post-Maoist legitimacy. Could it survive the wrath of jobless graduates and rural migrants if it provokes America into erecting trade barriers, killing the globalisation goose that lays the golden egg?

American can if necessary retreat into its vast home market and rebuild its industrial base, well-armed with 12 aircraft carrier battle groups.

The last 12 months should be lesson enough that Asia cannot yet stand on its own two feet. Its mercantilist export model remains a "high-beta" play on the West, to use trader parlance.

Japan's industrial output has fallen 34pc. China's exports are down 23pc.

Ray Maurer, from Qatar's QNB Capital, said China may be too busy closing factories it should never have built to challenge US primacy over coming years.

"China is not going to be a juggernaut until it creates a viable economy based on home consumption. It's just a tiger, living a myth," he said.

Lombard's Charles Dumas says the "super-savers" (China, Japan, Germany) have warped their own economies by relying on exports and, therefore, on perpetual debt build-up by the West.

"Their currencies are due to decline against the dollar as weak US recovery throws a few scraps from its table, over which the world's exporters will have to scrabble, cutting their prices and currencies in the process. The US is not, and is not about to become, Argentina or Zimbabwe," he said.

Let us not forget how we got here. Japan amassed a quarter trillion dollars of US bonds from January 2003 to March 2004 in a frantic effort to drive down the yen and stave off deflation. It has not yet won that battle. Producer prices fell to minus 3.8pc in April, a 22-year low.

China's holdings of US bonds are a consequence of its own policy of holding down the yuan to boost exports. Beijing may rage about America's "helicopter" stimulus, but what would have happened to the factories of Guangdong if the Fed had not taken emergency action or if the US Treasury had allowed the banks to collapse? China wants it both ways.

The world economy has long been running on fumes. The debt appetite of the Anglo-sphere and Club Med kept demand afloat, concealing excess capacity. The deformed interplay of Asia's Confucian model and Western consumption ran unchecked, until the imbalances blew up.

Yet it is easier to blame Uncle Sam, subprime, and friendless bankers. A folk tale has captured political discourse everywhere, from Beijing, to Tokyo, Moscow, and Berlin. If they are foolish enough to act on this self-serving illusion, they will pay the higher price.

The comments make more sense....
Asia does not need the US. It can simply dump it`s exports in the ocean and start its own `funny money` printing presses.

The US has nothing to offer but nostalgia.

This is too much attention, given to a mere shill for the print-a-living nations.

This so called economic journalist ''Ambrose'', has no clue what so ever. China has won the game hands down. It is very easy to explain. China accumalates USD and than buys all of the worlds tangible assets, copper, gold, oil, cobalt etc etc. He who controls the tangible assets weilds the power. It is really that simple. The next step down the line is war over these commodities. Very easy to understand plain and simple.

Ambrose an apologist for Keyensian-militarist lunacy? Didn't expect that...

Sir, you are SO wrong on this one. The US is finished as an empire, which is a GOOD thing. The Chinese have intentionally positioned themselves to pick up all the pieces from this crash. The economic fundamentals are overwhelmingly on their side (and I'm not exactly happy to be saying this). The US is beyond bankrupt and the dollar is toast. One of the last props holding the dollar up - the hope that Obama might restore some credibility to the US govt - is now gone. The world now knows that Obama is GWB2, and so the common shares of USA Inc. will soon reflect the corrupt and criminal management.
The Chinese commies are evil as well, but they are NOT stupid.

So lets get this straight. Asia has all the productive capacity and savings pool, the west has a ponzi scheme economy based on speculation and vendor financing using worthless fiat money and they are the ones in trouble! In the madcap world of the Keynesians, all we need to do is print our way to prosperity. God save us from the opinions of "experts" like you Ambrose!

No Ambrose, you're in denial.

If the Chinese stop buying US government bonds, the dollar will collapse and Americans will be too broke to buy Chinese products. However, as the dollar falls China's currency will rise, and along with it will rise the purchasing power of the Chinese people. China's vast population will start to consume their own products.

The only reason foreigners continue to finance America's current account deficit by buying US bonds is because the dollar is the world's reserve currency. If they allowed the dollar to collapse their foreign currency reserves would decline in value. However, China is diversifying out of the dollar by purchasing gold, copper and other currencies. When they finish this process of diversification they will stop buying US bonds and start selling the ones they already have.

It is the producing/saving economies that have power, not the debt/consumption countries. Production is difficult, not consumption.

�America can if necessary retreat into its vast home market and rebuild its industrial base, well-armed with 12 aircraft carrier battle groups�.
How would America raise capital to rebuild its industrial base, it has no domestic savings. Who do you think pays for the US military? It's foreigners, by purchasing US bonds.
America eventually will have to stop its phony borrow and consume economy and rebuild a real economy based on domestic savings and production. This will take a long time, and will start when Obama's ridiculous Keynesian stimulus packages based on deficit spending fail.

A 'Copper Standard' for the world's currency system?

Hard-money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get 10 times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters), and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor," floated by John Maynard Keynes at Bretton Woods in 1944.

The Bancor was to be anchored on 30 commodities -- a broader base than the gold standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.

If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49 percent this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15 to 20 percent this year as construction wilts.

Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports -- almost half GDP -- fell 17 percent in March.

While Beijing's fiscal stimulus package and credit expansion have helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50 percent.

One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.

This is slightly disingenuous. China has the world's largest reserves -- $1.95 trillion, mostly in dollars -- because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.

The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: It stops the yuan rising without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; and the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.

Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1 percent, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a copper standard as a gold standard.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html