Four days ago, economists from the world’s second largest economy, China, gathered together at Tsinghua University.
The deputy governor of the People’s Bank of China stood at the podium, and announced:
“It is no longer in China’s favor to accumulate foreign-exchange reserves.”
This simple statement may be the single most significant one the world has heard in the past twenty years.
We’ve seen the writing on the wall for some time now, but this is the first time a Chinese official has publicly declared the macroeconomic changes that are coming.
The winds of change are blowing… are you prepared to weather the coming storm?
Wait, what just happened exactly?
The gravity of the situation can only be understood within the context of the past thirty years.
Since the 1980’s, the United States has continued to enjoy unprecedented economic growth, but this came along with unprecedented government spending.
For most of this period, unfortunately, the U.S. government has repeatedly spent more than it earned.
The situation grew worse from 2005 onwards, as Federal spending rose sharply, while revenue stopped growing.
From 2005-2013, the U.S. government has been getting into an average $1 trillion of additional debt per year.
So What’s Wrong With That?
Technically, this isn’t a problem as long as people are willing to keep buying increasing amounts of U.S. government bonds (i.e. keep lending them more money).
As long as your credit card company is willing to extend your credit indefinitely, you can keep spending as much as you want.
Why China (Used To) Want A Strong Dollar
The United States is the second largest trading partner of China.
By having a weak yuan, the Chinese could keep selling its cheap manufactured goods to the U.S.
And, as you may know, the Chinese government keeps the yuan weak by buying U.S. government bonds.
As long as China is willing to keep buying those bonds (i.e. lend money to the U.S. government), the U.S. government can keep spending as much as they want.
So What’s The Problem Now?
By declaring that it is paring down the accumulation of foreign exchange reserves, China is essentially saying that it is cutting down on purchase of U.S. bonds.
In other words, China is reducing the amount it lends to the U.S…. and really, who can blame them?
By endlessly printing $85 billion a month, the Federal Reserve is effectively lowering the value of their debts to China. Each additional dollar printed lowers the purchasing power of the $1.3 trillion debt.
In my opinion, China has had enough. They have given up hope of the U.S. government acting responsibly.
How This Will Affect You
The U.S. government gets its revenue from 2 sources: foreign and domestic.
With their largest foreign debt buyer refusing to support their spending any further, their only alternative is to look for funds domestically.
And how do you suppose they’ll get those funds? Ask for donations, perhaps?
I doubt it.
Like a desperate man neck-high in debt, you can bet that they’ll pull every trick in the book to get their hands on the money of as many people as they can.
So if you have financial ties to the U.S., now’s the time to put your money somewhere else, if you haven’t already.
Very soon, you’ll see more regulations, policies and bills being passed in Congress that restrict your ability to move funds out of the country, or for your own use.
You’ll see increasingly, how the government will interfere with how much money you hold, how you transfer it, and where you transfer it to.
And while this is happening, the dollars you hold will erode in value as the politicians continue to print their way out of debt.
As I always say, when the sh*t hits the fan, whose interest do you think your politicians will protect? Yours, or their own?
How Much More Are You Willing To Tolerate?
Even China, after propping up the U.S. Dollar for decades, is now throwing in the towel. They know the U.S. government isn’t going to change its ways, and so will have to cut their losses.
Heck, there are even discussions to start pricing crude oil futures contracts in yuan instead of dollars.
One after another, we continue to see more cracks in the armor of global U.S. dominance. In trader-speak, the trend for the United States is down.
It is only a matter of time before a single, unexpected incident occurs that causes the situation to nosedive.
The world is changing right before our eyes, and it is those who think that everything is fine, that are the ones most at risk.
Are you playing a game of Russian roulette with your future?