Now I Get It!

This article was originally posted in 2004 (but was since destroyed on the server when I accidentally blew up‘s database last year).  This is the original article, posted from my local hard drive, added to give some archived historical perspective for the current

Now I Get It!

September 30, 2004

During the raging inflation-fueled bull market of 2003, my portfolio consisted of many gold, commodity and resource stocks.  Among them were China Petroleum (Sinopec) and Noranda, Canada’s largest miner of “industrial” metals.  So of course I found it interesting when I read that China’s state-owned Minmetals planned a takeover of Noranda for “about $5.7B”, and fellow state-owned entity Sinopec “is in talks to acquire a large lease of oil bearing land” in Canada.

Maybe now we are getting some answers to the question “why would China take such a debased currency in such hideous volume in return for its exported goods?”  (according to Stephen Roach’s latest, and highly recommended  report “Collision Course”, Asian central banks currently hold about $2.2 trillion in foreign exchange reserves).  As long as the USD remains functional as a medium of exchange, China’s hundreds of billions will obviously come in handy as it seeks to secure the natural resources it needs to continue to phase two of it’s rise to industrial powerhouse.  Phase one of course being its deft use of a hubris-blinded, superpower trading partner willing to go as deep into debt as necessary to keep up the consumption habits it has come to think of as divine right.

In phase one, Americans have happily gone along with Roach’s “new paradigm”, where China more and more controls the means of production, and the US controls the means of production of a different kind; that of the world’s reserve currency.  In essence the game goes like this: “You keep making cheap stuff (wink wink) and we’ll keep printing this paper (wink wink) and pay you huge amounts of it.  Sure, there will be ‘economic girlie men’ out there saying this can’t be done, but LOOK at us, we’re DOING it!”.  I don’t doubt there are legions of people taking the attitude of “if it ain’t broke, don’t fix it”, but that’s just the point, it is broke.  The fallout is just not obvious to all yet.

But something tells me a strong hint of what’s to come was just flashed for all to see with the above acquisition announcements.  China’s planners are not so dumb after all.  They’ll use an advantageous labor arbitrage and currency peg to gain global industrial production market share, ship en mass to the largest consumer engine in the world, receive payment in the heretofore most trusted world currency, and for the master stroke, turn around and recycle those dollars into the very commodities, goods and resources that will be necessary for their continued growth and climb to world power.

That’s great for China.  They are a patient, industrious and intelligent people.  Those descriptors and more used to apply to the US.  But with outsourced industries, limited attention spans,  and plenty of credit (debt), the US has lost its edge.  If you take a deep breath, do the math, and really look at this honestly, you will see the United States, proud former industrial power, is poised to take a big hit when the time is right, when China decides it has offloaded enough paper for the resources it needs.  We will have nothing to fall back on but all those dollars sloshing around the global system, and all the debt that every dollar denominates.

It would be wise for individuals to think about making like the Chinese and converting some of those dollars into hard assets.  Unfortunately, most people will first think of housing and the stock market as a dollar hedge, as each has gone up in value (vs. the dollar) without fail since the Federal Reserve system was established.  But this is a new America (and a new paradigm), the one that (wink wink) seemingly doesn’t need to hold itself to the traditional laws of economics.  Paper assets such as stocks are denominated in dollar debt.  Housing is subject to the bond market’s ability to carry on appearances.

As the inflation/deflation debate rages, in my opinion, only the timing of the dollar’s ultimate demise is in question.  Of course, the unimaginable might happen and we might start taking the bitter medicine immediately upon the election or re-election of the next US President, show good faith deficit reduction initiatives in cutting wild cat money creation and spending, collectively wake up to new (or old) ideals and values, and go about fixing our country. In my opinion, what ails us is a simply massive credit and debt binge, and the sloth that such easy access to anything we desired has wrought.  If we were to somehow break this cycle, the global economic powers that be might even cut us a break as we pick ourselves up by the bootstraps, as America has always done before.

But how can this happen, when ninety percent of Americans would probably say “What are you talking about you economic girlie man?  We got it good!”?