According to Asian news tonight, China is playing a little game to keep the dollar up while they buy commodities with it.

They are rolling out of the long term debt and replacing it with short term and even buying a little extra if need be.

That means when the FED starts raising rates (if the dollar doesn’t collapse or fall a lot) they will get a new interest rate increase every few months or so. The Congressional Budget Office is already projecting a quadrupling of interest in the coming years because of this, and I think they are way too optimistic because that wasn’t based on all this switching to short term debt.

But, just at their projection level. All income taxes would go for just interest and still not cover it at current employment rates. Yet, the budget will grow probably 10% a year if CPI is growing 10% a year as they expect could happen for a few years. (I think higher and longer short of a collapse then shorter but much higher).

Doesn’t look good with all the non-dollar deals China is making with trade partners.

OK investor. Social Security will probably go negative cash flow this year or next. Based on a lower peak in unemployment than we have, they said the surplus would be $16 billion this year and $3 billion next. Just last year they projected $84 billion for this year and a couple of years ago it was one or two-hundred billion.

On tax revenues, not all tax revenues. Only income tax. For this year so far we are running under $100 billion a month and probably won’t hit a trillion for the year as unemployment is still rising.

http://www.financialsense.com/editorials/casey/2009/images/0519_clip_image001.jpg

The total interest on debt for the public

The Congressional Budget Office expects interest payments to more than quadruple in the next decade as Washington borrows and spends, to $806 billion by 2019 from $172 billion next year.

http://www.financialarmageddon.com/2009/05/big-numbers.html
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However, when you add the interest on intergovernmental holdings, (almost $300 billion) then you see that it goes over a trillion.

I think, as I stated, that is very conservative and look for it to be more like $1.5 to $2 trillion if the dollar hasn’t fallen dramatically in which case it would be in hundreds of trillions. If we only had 1/2 the inflation in a currency crisis that Zimbabwe had, it would be over a million% CPI Just one tenth would still be so high that you couldn’t get another nation to take your money.

So, lets just assume it won’t collapse but, that is still so bad, it will mean we will still be in a depression as all our taxes would be going for mandatory spending and not all of that could be met. That will happen long before it quadruples however, if the interest rates rise and crush the economy or the dollar collapses. They virtually have to default at some point or hyper-inflate.

What is the way out?
There is no way out. We can maybe delay this for awhile.

I read an article that said Geithner was speaking to some students and told them that their investments in the U.S. debt were safe and they laughed at him.

Folks this is a real threat, not just words and each day the world turns more to China to lead out of this global slowdown the more they will do and say about the dollar.

They have already made six trade deals where the dollar won’t be used. Iran sells oil in euros and yen. Brazil and Argentina both have made deals with China and with each other to stop using dollars in trade between them. Four other S.A. nations have said they will join that move. Russia is making deals in non-dollar terms. China is the largest consumer of most things now, except oil and is closing in on that as our demand drops and theirs rises.

The more the world looks to China for leading this recover, the less they not only look at the U.S., the less they will want our dollars. The American people are being deceived with all the happy talk.

That said, the U.S. markets could keep going up. So many of our stocks have international exposure that we could be in a depression and the markets still be going up as foreign earnings are growing and being converted into devalued dollars that make them look even bigger.

Commodity companies, exporters like Caterpiller, grain exporters and agriculture companies that will benefit from rising global food prices will benefit and so will their shares but, that doesn’t put many people to work nor does it help our tax revenues that much. It will help keep things from getting too bad until the dollar collapses but, that is about all.

This is the biggest power and economic shift in history or at least back to when we took power from England. Be prepared for sharp corrections but, don’t think the market can’t keep going up as long as China is leading and the world is following and pouring investment money into China.

That is the thing about the world looking to China. They will send even more investment money to them to keep the momentum going soon, if this has legs. And the more they send them, the less they buy our bonds. Why buy U.S. debt when you can buy equities that are rising, thanks to the emerging markets and 2 billion middle class consumers spread around the world.

This is something I never thought would happen for years. I knew the trends were in place for the U.S. to lose economic leadership but never in my wildest dreams did I see this coming this fast.

The world is literally turning its back on us to lead and focused on Asia which is encouraging all kinds of spending and trade. I think that very soon you could see money pouring in from all over the world to invest in Asia again creating a new boom (and maybe bubble).

The bad news is that they won’t be buying U.S. bonds. Why buy U.S. bonds when you can make 10 times that in equities tied to growth nations and 2 billion middle class consumers (in purchasing power, not standard of living so much) spread around the world buying from Asia.

I just read an article about “perception is reality” and in this case, the article stated that the “perception” is that China is growing and leading a recovery and that will cause money to flow and make the perception reality (maybe, but I am still dubious and ready to sell if it fails).
–Jan

Related Posts:

• How interest rates could double, triple or quadruple?
• Any rise in interest rates will speed up the collapse.
• How about no recovery for a decade?
• Want to see where GDP without the 11% jump in government spending?
• Tonight on Asian news they were calling for a correction in gold to reach $870 before taking off to $1,200 later this year or next.

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