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Sunday, March 11, 2012

Why China Is Dumping The Dollar - And Why You Should Read Up on the Weimar Republic

Governments only have 3 ways of raising revenues 1. taxes 2. debt and 3. just print money. Raising taxes is unpopular so borrowing has become the choice of government to fund its programs, corporate subsidies, foreign policy and 'bread and circus' entitlements to keep the masses content so they don't revolt. As mountains of unsustainable debt are literally starting to financially strangle nations and their economies, the fault lines in the fiat monetary systems are beginning to rupture. The PIIGS (Portugal, Italy, Ireland, Greece, Spain) can't pay their debts. At the end of WWI the west imposed draconian reparations on Germany. The Germans couldn't afford to pay so they decided to just print their way out of the debt. The Weimar Republic (1918-1933) printed so much paper money that it's been said that it took a wheel barrel full of Deutsche Marks just to buy a loaf of bread. Paper money always reverts to its intrinsic value of zero. No nation wants to be stuck with the worthless bonds of another nation, especially when the perception is that those debts will never be paid. Therefore, it's quite reasonable that China would be concerned about its holdings in US Treasuries.

China is systematically dumping the dollar (and beginning to set up other agreements). CNBC assures everyone, however, that things are fine. Don't read those anonymous financial blogs. China has a long way to go in turning itself into more of a consumption based economy, so the dumping of USD has to be rather gradual (as to not rock the boat too much, the U.S. still needs to be supplied the funds to purchase Chinese goods, and also most trades are settled in USD for now), but it is happening. One major reason for this action by China is due to the fact that the United States Government has loaded up on so much debt that it's not possibly sustainable - and the Federal Reserve knows that unless they want to see the house of cards the Keynesians have built come crashing down, they have no choice but to completely monetize the debt.

Read the rest here
Zero Hedge

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