U.S. Move Will Push Russia and China Toward Economic Matrimony

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So it's happened at last. All pretense of sanity has been summarily discarded in favor of the perpetual feedback loop. The Fed is now purchasing its own currency, kiting checks to itself in a flagrant display of Orwellian-esque doublespeak. . .Gold’s immediate sprint to positive territory is the only economic signal so far to cast the announcement in its correct light.

So it's happened at last. All pretense of sanity has been summarily discarded in favor of the perpetual feedback loop. The Fed is now purchasing its own currency, kiting checks to itself in a flagrant display of Orwellian-esque doublespeak. The fact that bond traders and mainstream financial commentators hail the development demonstrates the depth of ignorance and/or beguilement prevalent in the collective economic imagination.

Gold’s immediate sprint to positive territory is the only economic signal so far to cast the announcement in its correct light. To categorize it as dollar negative and gold positive is to understate. This is the biggest step yet in the impending demise of the U.S. Dollar.

While the move is positioned in the media as evidence of the determination collectively embodied in the U.S. government to stimulate the economy, it is more accurately perceived as a pre-emptive move to offset the diminishing international interest in future participation in U.S. Treasury auctions. The ratio of domestic purchases to foreign ones have been skewing consistently towards domestic, and it is likely Chinese Premiere Wen Jiaboa’s comments about the safety of China’s investment in U.S. debt rattled Team Obama’s nerves substantially.

The question is whether or not the Chinese will be able to swallow this latest sleight of hand and not lose face by doing so. While they are indeed stuck in unenviable position in being damned if they do and damned if they don’t divest themselves of U.S. debt instruments, there can be little doubt that an exit from the position is both desired and sought.

The conundrum for China lies in the fact that if they keep the increasingly fragrant U.S. paper comprising $1 trillion of their foreign reserves, the gradual yet inevitable erosion of the value of that position means the net worth of China will be concurrently dragged downward.

But if they do start dumping Treasurys, then the value of the U.S. dollar would likely collapse as China’s move would lead the broader market into a wholesale rush to the exits, thereby accelerating their foreign reserve devaluation.

The announcement by the Fed that they are now buying Treasurys is a pre-emptive move designed to buy time for foreign holders of U.S. Treasurys as well as for the U.S. Federal Reserve.

What China is looking for is a way to trade the U.S. dollar denominated instruments for anything otherwise denominated, but to do so without the general perception of Chinese abandonment of U.S. debt.

Of note, China and Russia are cozying up to each other, burying past acrimony and evidently eyeing each other as potential trading salvation. A more powerful combination of trading partners could not likely be imagined, and a strong trade alliance between those two superpowers would have the twin effects of canceling out American military and economic superiority. Japan would quickly seek membership in such an alliance, and this eventuality is what will most likely put the final nail in the U.S. economic coffin and reorient the entire global economy to the east.

In 2008, China remained Russia's second largest trading partner only after the European Union, while Russia ranked as China's ninth largest, compared to the seventh in 2007, according the Chinese Ministry of Commerce.

Last month, the two nations signed a oil-for-loan deal, under which China offered Russia $25 billion in a long-term loan and Russia would supply 300 million tonnes of oil through pipelines to China from 2011 to 2030.

According to China People’s Daily, 2009 is the “Year of the Russian Language” in China, and joint cultural exchange programs have been organized between the two nation’s cultural ministries to enhance awareness of each other’s cultures, particularly among youth.

Alexander Zhukov, Deputy Prime Minister of Russia, said in the online chat on March 19 with Chinese visitors to People's Daily Online,

“At lease 50 activities will be held during the Year of the Russian Language in China in 2009. Russian publications introducing Russian classical and modern literature, Russian textbooks, will be introduced to Chinese students.”

Mr. Zhukov said that students of the two countries had joined well-organized and extensive exchanges in recent years. More Chinese children from quaked hit Sichuan province will go to sanatoriums in Russia, where they will learn Russian. Summer camps and winter camps will be held and exchange centers for youth will be built in China.

He disclosed that China had proposed to encourage thousands of students from some 2,000 middle schools and colleges in China and Russia to communicate with each other through the Internet. "We had very happy memories of exchanges between young people by writing letters in early years after the foundation of the People's Republic of China," said the Russian Deputy Prime Minister.

Some 20,000 Chinese students are studying in Russia. More than 500 of them have got fiscal support from the Russian federal government. Some 5,000 Russian students are in China. About 200 of them financed their programs through public funding.

Russia is a friendly neighbor of China, and People's Daily Online hopes to build a bridge between China and Russia by enhancing communications and exchanges, so as to make its own contribution to the development of a friendly China-Russia partnership." said He Jiazheng, President of People's Daily Online, who hosted the chat in Moscow.

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