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Great Depression Online Archive Issue:

Sitting on the World's Largest Stockpile of U.S. Treasuries

Great Depression Online
Long Beach, CA
August 20, 2010

Inside This Issue You Will Discover…

*** China Ascends to Number Two
*** How They Did It
*** Sitting on the World’s Largest Stockpile of U.S. Treasuries
*** And More

“Political work is the life-blood of all economic work.” – Mao Tse-Tung

China Ascends to Number Two

Stocks went down yesterday.  Jobless claims rose.  Just two more dots to connect as the world turns from west to east.  Here’s what we mean…

It is now official: China has overtaken Japan to become the world’s second largest economy.

“After three decades of spectacular growth,” reported the New York Times, “China passed Japan in the second quarter to become the world’s second-largest economy behind the United States, according to government figures released early Monday.

“The recognition came early Monday, when Tokyo said that Japan’s economy was valued at about $1.28 trillion in the second quarter, slightly below China’s $1.33 trillion.

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“Experts say unseating Japan — and in recent years passing Germany, France and Great Britain — underscores China’s growing clout and bolsters forecasts that China will pass the United States as the world’s biggest economy as early as 2030.”

Perhaps China will ascend to number one even sooner…they’re well on their way.  Last year China passed the United States to become the world’s largest market for passenger vehicles.  Also, last year, China passed Germany to become the world’s biggest exporter.

So how did they do it?

How They Did It

Sometimes in this wacky world things are so crude and rudimentary it’s amazing they ever came to be.  Take the anteater, for example.  What a bizarre creature?  Yet, if it weren’t for ants they wouldn’t exist.

Similarly, national economies are bizarre too.  One nation goes about building its economic stock by selling bananas.  While another specializes in wool suits.  But when it comes to a nation getting rich with a crude and rudimentary economy, China takes the top spot.  

You see, it really is quite simple how China went about becoming an economic powerhouse.  They used cheap labor and a cheap currency to make cheap stuff.  But what’s equally crude and rudimentary is that the American consumer ran up their debt buying the cheap stuff…and, in the process, financed China’s economic growth.  What’s more, Alan Greenspan encouraged it…

After the dotcom bust, when Greenspan cut rates in an effort to soften the stock market’s fall, money flowed into housing…inflating values.  And then, the new found equity was extracted to buy all sorts of doodads from Asia.

From China alone the U.S. trade deficit ballooned from $103-billion in 2002 to over $250-billion in 2007…in what must be, without a doubt, the largest transfer of wealth in human history.  Here’s how it happened…

Sitting on the World’s Largest Stockpile of U.S. Treasuries

Some time in the early 1970’s, for the first time in its history, the United States’ trade balance went progressively negative…it began importing more than it was exporting…it began consuming more than it was producing.  In other words, the United States began earnestly transferring its wealth to other nations.

Yet the trade deficit didn’t really get too off kilter until after the turn of the new millennium.  Since then the trade deficit has gone negative by Grand Canyon sized gulfs and gorges.  In fact, the trade deficit was $166 billion in 1998; by 2006 it was a gaping $753 billion chasm. 

With the onset of the current depression the trend has subsided…with a trade deficit of $700 billion in 2007 and just $374 billion in 2009.  You can take a gander at the U.S. Census Bureau data here: U.S. Trade Balance of Payments http://www.census.gov/foreign-trade/statistics/historical/gands.pdf.

Looking at just the trade deficit, however, only tells half the story of what has been going on.  For as the U.S. exported dollars – largely to China in recent years – in exchange for cheaply manufactured plastic gewgaws, undergarments, and electronic knick-knacks, China had its own conundrum… 

What to do with its rapidly growing pile of dollars?

In a relationship of symbiotic disharmony China recycled their dollars into U.S. Treasuries.  Essentially China took the excess dollars from the U.S., resulting from the U.S. trade deficit, and loaned them to the U.S. Government, thus financing more and more of the national debt.

Thanks to its huge trade surplus, Beijing [China’s central government] is sitting on the world’s largest stockpile of U.S. Treasuries – about $843 billion.

One day, no doubt, they’ll want their money back.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  It’s no secret.  The U.S. Government will never be able to pay back China with anything close to resembling today’s dollars.  Instead they’ll print money and inflate the debt away.  It’s a pretty neat trick except for the fact that it’ll inflate away your life savings too.  That’s why you should take a moment to investigate this one extremely promising option for protecting what you have (hint: it’s not gold).

Learn more.

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