–Do we owe China too much if China owes us too much?

Twitter: @rodgermitchell; Search #monetarysovereignty
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Mitchell’s laws:
●The more federal budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which ultimately leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The penalty for ignorance is slavery.
●Everything in economics devolves to motive, and the motive is the gap.
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I enjoy reading a website called “The Daily Bell,” because it is entertaining — laugh-out-loud entertaining.

It is written by a man named Anthony Wile, “Chief Investment Advisor of High Alert Investment Management Ltd.” So far as I can tell, he seems to: Believe everyone should buy gold, love Ron Paul, love Peter Schiff, hate Keynes, hate “fiat” money and be ignorant of Monetary Sovereignty. And oh yes: Buy gold.

Recently, his site published an article titled, Another Chinese Economic Problem: Sky-High Debt Ratios:

China’s boom is to a large extent self-funded. The US can fund its enormous deficit because the dollar is the world’s reserve currency. Countries around the world hold dollars.

Wrong. Being the world’s reserve currency merely means that as a trade convenience, banks around the world hold dollars in reserve.

It has nothing to do with the federal government’s ability to “fund” its deficit, whatever that means.

The deficit is no burden, because our Monetarily Sovereign government has the unlimited ability to create dollars and to determine both the exchange value of the dollar and national inflation rates. That is what being “sovereign” entails.

Those Monetarily Sovereign nations (Canada, UK, Japan, Australia, China et al) whose currencies are not the world’s reserve, have the same powers.

China’s huge size and population and initial backwardness has allowed Chinese banking officials to treat China as a kind of miniature global system. The yuan may not be the world’s reserve currency but it’s China’s, and that’s been enough.

Wrong. Monetary Sovereignty, not size, are the keys to China’s ability to create its sovereign currency at will.

Then we come to the shockers:

The debt level] is up 20 percentage points of GDP since late 2013. The ratio has risen by 100 percentage points of GDP over the last five years. It has pushed debt to $26 trillion, more than the entire commercial banking systems of the US and Japan combined.

That should have been the clue. China is supporting a debt that is greater than “the entire commercial banking systems of the US and Japan combined.”

It sounds huge, but China seems to have had no problem supporting it. So, could the entire “debt-is-too-high” scenario simply be wrong?

The FT’s Jamil Anderlini points out here that the figure is very high for an emerging economy. Mature economies can handle a higher debt ratio for all kinds of reasons, not least because they have large assets to offset their liabilities.

Readers of this blog know that for a Monetarily Sovereign nation, the debt/GDP ratio is meaningless. Why? GDP does not pay for debt.

In the U.S., debt is the total of T-security deposits at the Federal Reserve Bank. To “pay off” this debt, the Fed transfers dollars from T-security accounts to holders’ checking account. No problem at all and no new dollars needed.

The federal government does not sell assets to pay its debts. Yellowstone Park and the Lincoln Memorial are safe.

Meanwhile, according to CNBC, China’s debt soars to 250% of GDP I sure hope China doesn’t have to sell the Yellow River.

This does not mean that China is about to crash. It has a state-controlled banking system. Therefore any bust scenario will play out in a different way, probably through much lower growth and two decades of Japanese-style extend and pretend …

We can inflate some of it away, or we can deflate into defaults and creditor haircuts. Pick your poison.

Forget the “bust scenario” whatever that imprecise term may mean. And forget about creditor haircuts, which are the famous province of the euro (monetarily NON-sovereign) nations.

Instead, think about “inflate some of it away.” This often misunderstood concept supposedly means: Inflation benefits debtors, because cheaper money can be used to pay debts.

Debts however, are not paid with purchasing value, but with face value. If China owes one trillion renminbi, it will have to pay one trillion renminbi, regardless of the purchasing power of those renminbi. Inflation has no effect on that.

But what if China owes one trillion dollars. It will have to exchange renminbi for dollars, and if the renminbi has lost value, China might have to spend more renminbi to buy the necessary dollars.

So what? China is Monetarily Sovereign. It can create unlimited renminbi to exchange for dollars, to pay its dollar debts.

Could this cause more inflation? Possibly. But remember, China has the same or even more, inflation-stopping tools at it disposal, as we do. China not only is sovereign over its sovereign currency, but as the author said, China has “a state-controlled banking system.”

The US in particular urged first the Japanese central bank and then the Chinese central bank to print additional currency that was used in one way or another to purchase US debt.

The currency was then redistributed in the US and recycled as consumer spending. The spending went back to first Japan and then China, thus fueling two “Asian miracles.”

Wrong, yet again. US debt cannot be purchased with foreign currency. To buy a T-bill, one must use dollars.

Further, dollars used to purchase T-securities are not “redistributed in the US.” That’s the “federal-taxes-pay-for-federal-spending” myth. Dollars in T-security accounts have but one place to go: To China’s checking accounts.

The only way American consumers can get their hands on those dollars is if China spends them here: i.e. China imports American goods and services. How has that been going?

In fact, it is U.S. dollar creation, not China’s borrowing, that funds American imports from China, the so-called “Asian miracles.”

This article provides us with further insights into the precipice on which China is now perched. We’ve usually commented on the eventual immanence of yuan price inflation; in fact, price inflation is already significant in Japan.

Only in the past year has Japan successfully and intentionally created inflation to fight its crippling deflation. Look at the trends:

The author would like you to believe that a large debt/gdp ratio (which has been the norm in Japan for many years) suddenly has caused the inflation Japan worked so hard to achieve.

The end result will no doubt be chaotic and ruinous. We will see then if those who have organized this deliberate, rolling insolvency shall have the wherewithal and credibility to create a kind of global Bretton Woods system that will reconfigure what is yet available.

And there it is: A gold standard will save us. Never mind that every time a nation has fallen into financial difficulties, it has dumped gold in an attempt to avoid a depression.

“The Daily Bell” is committed to selling gold to Anthony Wile’s clients.

And isn’t it ironic that for many years, debt hawks have decried the U.S. federal debt held by China. How often we have been told our debt to China is unsustainable and will break us.

Now suddenly, China’s debt to us has become unsustainable and will break China.

So we owe them too much and they owe us too much. Think about it. Does that make any sense, whatsoever?

Rodger Malcolm Mitchell
Monetary Sovereignty

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Ten Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually
8. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)
9. Federal ownership of all banks (Click here)
10. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)

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10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
Two key equations in economics:
1. Federal Deficits – Net Imports = Net Private Savings
2. Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports

THE RECESSION CLOCK

Vertical gray bars mark recessions.

As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.

#MONETARYSOVEREIGNTY