STAFF NEWS & ANALYSIS
China Paper Urges New Currency Order
By - September 23, 2008

You're here, there's nothing I fear,

And I know that my heart will go on

We'll stay forever this way

(Theme from the movie "Titantic")

Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday. The commentary in the overseas edition of the People's Daily said the collapse of Lehman Brothers Holdings Inc "may augur an even larger impending global 'financial tsunami'." … China is a major buyer of U.S. Treasury bonds, and through its sovereign wealth fund it has taken stakes in two large U.S. financial institutions. In July 2005, China revalued the yuan and freed it from a dollar peg to float within managed bands. But the yuan and China's trade remains tightly linked to the fortunes of the dollar. The commentary suggested China must brace for grave economic fallout and look to alternatives, saying the crisis brings to mind the Great Depression of the 1930s. "Lehman Brothers announced bankruptcy will not only have a domino effect on the global financial world, it will bring a shock to the world economy," the front-page comment stated. – Reuters

Dominant Social Theme: On and on, high finance will go.

Free-Market Analysis: OK, maybe. But one thing is fairly certain: The frustration of America's lenders will go on and on. The Chinese alone are on the hook for something like a trillion dollars of American Treasurys. In fact, you would think some of that nation's top communists would feel kind of snookered right about now. That line of Lenin's about the capitalists selling all the rope they need to hang themselves looks a bit ironic, given that the world's remaining big-time communist nation has spent the last decade buying US paper hand over fist. And that paper doesn't look very healthy these days.

Of course the Chinese may have fallen for the same story that the Japanese fell for a couple of decades ago – that they needed to prop America up so that they would have a market to sell into. It worked well for the Japanese until the late 1980s when their economy went into a seemingly permanent tailspin. It worked for the Chinese during much of the 2000s. The Chinese got a market and a bunch of Treasury bills and America got a lot of increasingly sophisticated goods and services and lately a lot of cut-rate electronics.

But now, the fiat-horse-trading may look to the Chinese to be not such a good deal. Maybe they are beginning to squeak. In any event, we have to wonder just how good it looks to the Anglo-Saxon elite supervising the mess on this side of the hemisphere.

We can't help but wonder if things unwound a good deal faster than those who supervise the fiat-money game ever expected. That's not to say, it wasn't expected because Lord knows if you spend all of your time supervising the shenanigans of a fiat-money system, you are going to know sooner rather than later just how jury-rigged it really is. But you may also expect that you have the time, money and power to unwind problems as you choose. But maybe not.

Is it the Internet? We've suggested that it is, that this unwinding is unlike previous ones in that so many more people are educated about the reality of central banking and willing to point fingers in that direction. The failing system, its failures documented daily on the ‘Net instant by instant, instead of once a day in a controllable environment on network news has made a qualitative change in the way the crisis has played out and also perhaps limited some of the ways that it can be handled.

That doesn't mean that all the old nostrums won't be trotted out, with some new ones besides. The initial blank check for $700 billion is a fairly eye-opening request. American Treasury Secretary Henry Paulson apparently wants to be able to buy assets from banks at whatever price he and the bank agree upon so that the "toxic" mortgages are removed from the book and the bank is better compensated than it would be otherwise.

The idea that it was presented to Congress as a three-page open-ended brief is eye opening as well. When they want to, these guys can be just as quick and blunt as those toughies in the private sector. Of course, come to think of it, they all come from the private sector, or at least move back and forth between government and "free enterprise" as Paulson actually has.

Lost in all of the excitement, we hasten to add, are the mark-to-market regs that likely exacerbated the current mess and a lot of other regulations besides. But having done the damage, the US administration is suggesting that it must now purchase the devalued paper and then gradually parcel it back out as the value improves. By any other name that sounds like a fairly virulent form of state socialism. (Risk accrues to the citizen's wallet and benefits accrue to those in charge.)

Answer these questions to get a better sense of the size of the earthquake currently rattling world markets: Exactly who is going to buy American paper after all this is over? And how is America going to extricate itself from a three or four front war (we're losing track) and all the trillions it is now putting on its balance sheet as the result of this endless financial unraveling?

Sure, America will stand behind its debt sooner or later (in some form) but American market dominance is likely broken, certainly badly shaken. Of course, to the Anglo-Saxon elite that stands at least partially behind this mess, the idea of an American monetary system was tolerable only insofar as it was a way-station to something else. Now it will be interesting, if we are correct, to watch what emerges from the wreckage. A new kind of financial governance? A different kind of system?

More questions to answer: How coordinated is the aftermath of the current financial chaos? Is Asia seemingly going off in its own direction or are European, America, Asian and even Middle Eastern entities speaking with one coordinated voice? If the ongoing "moving parts" of the current crisis seem to resolve themselves into a particular pattern then one can be fairly sure a new kind of financial structure is arising before our aching eyes.

If so, the man in the middle, American Treasury Secretary Paulson will receive accolades for being in the "right place at the right time." We read somewhere that Paulson had taken the job because he actively anticipated a monetary crisis before the end of his term. Given that China is a key to this "crisis," we checked recently with Wikipedia on a hunch to see what kind of relationships Paulson had built with the Chinese during his Goldman Sachs career.

Here's an excerpt from the Wikipedia bio:

Paulson has personally built close relations with China during his career. In July 2008 it was reported by The Daily Telegraph that: "Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country over 70 times." Paulson has been described as an avid nature lover. He has been a member of The Nature Conservancy for decades and was the organization's board chairman and co-chair of its Asia-Pacific Council. In that capacity, Paulson worked with former President of the People's Republic of China Jiang Zemin to preserve the Tiger Leaping Gorge in Yunnan province. Paulson is also on the Board of Directors of the Peregrine Fund; was the founding Chairman of the Advisory Board of the School of Economics and Management of Tsinghua University in Beijing; and, previously served as chairman of the influential trade group, the Financial Services Forum.

After Thoughts

Obviously, Paulson is no stranger to Chinese power brokers. And since that is so, he is probably also familiar with the famous Chinese proverb "may you live in interesting times." If articles such as the one that just appeared in the People's Daily are truly an expression of frustration by the powers-that-be, then maybe the globalist consensus is starting to split apart, and Paulson will have his work cut out for him. That would be a startling but interesting development – one that would have all sorts of ramifications for numerous kinds of investable items from stocks, to bonds, to currencies and, of course, gold and silver which tend to benefit from their safe haven status. On the other hand, Paulson already seems to "be there" when it comes to the Chinese. Somehow we are not surprised.

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