A Russian analyst named Dmitry Kalinichenko recently penned a brilliant article entitled “Grandmaster Putin’s Golden Trap”. The original article was written in Russian and subsequently translated into English. Some of the translation’s language is a little rough, but it all makes sense.
Part of his article discussed the significance of a recent announcement by China:
“China recently announced that it will cease to increase its gold and currency reserves denominated in US dollars. . . . [W]hen this statement translated from financial language, it reads: ‘China stops selling their goods for dollars.’
“The world’s media chose not to notice . . . .
“The issue is not that China literally refuses to sell its goods for US dollars. China, of course, will continue to accept US dollars as an intermediate means of payment for its goods.
“But, having taken dollars, China will immediately get rid of them and replace with something else in the structure of its gold and currency reserves. Otherwise the statement made by the monetary authorities of China loses its meaning: ‘We are stopping the increase of our gold and currency reserves, denominated in US dollars.’ That is, China will no longer buy United States Treasury bonds for dollars earned from trade with any countries, as they have previously.”
In other words, China won’t lend any more currency to the US government. China hasn’t stopped taking dollars. China hasn’t tried to dump all the dollars it’s already accumulated in its foreign reserves. But China has stopped adding more fiat dollars to its pile of foreign reserves. As soon as any new fiat dollars come to China, they are spent, primarily, to buy gold.
China has thereby reduced and perhaps ended the US government’s access to additional Chinese credit.
• In A.D. 2011, Standard & Poor’s downgraded the US government’s credit rating from AAA to AA+. If S&P had been honest, the gov-co’s credit rating would’ve been downgraded much further. Nevertheless, that downgrade meant the US government’s access to credit was reduced and/or made more expensive, and fewer nations or institutions were willing to lend to the US government.
In A.D. 2014, the Federal Reserve “tapered” and then stopped QE. That meant the Fed has stopped openly functioning as creditor for the US government.
And now, insofar as China refuses to increase it’s holding of US Treasuries, China is also refusing to provide additional credit to the US government.
Implication: the US government is running out of creditors and has less access to borrowed funds.
Over the past several years the US economy has declined (last November’s Black Friday sales were down 11% as compared to last year’s). That decline suggests the following:
• Despite the government’s “happy daze” economic statistics to the contrary, the real number of unemployed may be John Williams at ShadowStats.com denies that the gov-co’s “official” unemployment rate (less than 6%) is accurate. John believes the real unemployment rate is over 20% ;
• The resultant demand for more welfare dollars is rising;
• Government welfare costs are rising;
• Increased unemployment and a slowing economy mean that tax revenues are falling;
• Government finances are being squeezed between lower tax revenues and higher costs;
• As seen with its falling credit rating, the Fed’s termination of QE3 and declining access to Chinese credit, the US government has less access to credit.
If the government has rising costs, falling tax revenue and diminished access to credit, it has only three choices: 1) cut costs ; 2) admit bankruptcy; or 3) spend savings.
• If government cuts costs, government will become smaller and less powerful. Cutting costs is the last thing Big Government wants to do—and will do so only in desperation.
If government is forced to cuts costs, government will become even less popular than Obama.
I.e., if government cuts pensions, the senior citizens will scream. If government cuts welfare, minorities will scream. If government cuts back on “free” healthcare, much of the nation will scream. If government cuts back on defense spending, the military might not scream but they will holler and perhaps expose the US to foreign adversity which our impoverished military may be unable to confront.
If government cuts military costs, we may become a paper-dollar tiger.
• Declare bankruptcy? Seriously?
Who’d believe that it was even possible for the almighty US government to be bankrupt? Not many. A government bankruptcy seems too fantastic to be believed.
Written by: ALFRED ADASK – continue at ADASK’S LAW