Chinese Economists favor gold over US Bonds

70 Chinese Economists were recently surveyed. The results should cause all Americans to at least raise an eyebrow, for China is now the largest holder of US Treasuries in the world. Not only do they own more dollar denominated debt than anyone else, the massive bailout and stimulus initiatives cannot work if China is not a major buyer of new Treasuries.

More than two-thirds of surveyed Chinese Economists favor the central government invest in gold, rather than US Treasuries.

This does not bode well for the US, EU, or any major trading parties to either. The banks of the EU appear to be in more trouble than US banks, and their economy has only recently realized this. They will also need to fund massive bailout efforts, and will need large amounts of buyers for newly issued debt to pay for it.

For all of us paying attention, the bailouts and stimulus efforts will not end with the current US government proposals. The hole created by losses associated with derivatives is not yet fully recognized. Tens of Trillions, maybe more, of the derivative class of bonds have yet to be downgraded. That means further losses on the initial investments, and higher payouts on the CDS insuring them.

As an example, as I have written recently, AIG has already received $220 Billion in US taxpayer money, yet has exposure to more than $2 Trillion in derivatives through the CDS it has issued. The losses for AIG have only begun.

The survey highlights even more alarming sentiments; 65.6% of the economists believe China should not only stop buying US Treasuries, but they they should start selling at least some Treasuries. 42.8% stated that the Chinese central government should sell most of them, with 10% of the economists adamant that China unload all US debt.

The Chinese favor gold as the replacement to US treasuries.

Should China stop buying US Treasuries, the US is basically dead in the water. What our government is not telling us is China is integral to the bailouts working. We need China to keep buying, or else we cannot service the debt we have already issued. Servicing the debt means paying the interest on Treasuries already issued, and returning the principle on maturing Treasuries.

If China stops buying our bonds, interest rates will have to rise, maybe dramatically, to attract buyers. Rising interest rates will add significant burden to everything.

If China starts selling, even small amounts, of US Treasuries, they will be in competition with our own weekly auctions. The risk that we cannot sell enough Treasuries to cover the servicing could translate into a downgrading of all US denominated debt. All of the above will happen two-fold.

Don't even think about China selling all US Treasuries. The reality is far too grim.

If China starts putting its extra money into gold, they, of course, will place heavy demand on the supply of gold. Gold will go up, maybe a lot. This is not good for the US either, as the dollar has been the defacto world currency for the last 60 years. A major global sell-off of US debt might take place to capture gains in gold, and fears of a dollar collapse will increase.

It is amazing that the leaders of the greatest country in the world created a system that now allows the Chinese to control its destiny. All so they could make an extra buck.