I follow the U.S. Trade Deficits closely.  They, along with U.S. Consumer’s using their houses as ATM’s (which I figured out in mid-2005) are the primary reasons I am bullish on gold.  For some time I have been well aware of the amounts of U.S.$ held in Treasury Bills and Treasury Bill equivalencies – almost U.S.$2 trillion.  As I understand it, China has accumulated these U.S. equivalents through the following process:  Walmart (or some other U.S. business) orders U.S.$20 million of product from a Chinese manufacturer.  On receipt of payment in U.S.$ that Chinese manufacturer trades those U.S.$ for Chinese Yuan printed by the Chinese government.  The Chinese manufacturer then pays its employees in Yuan, buys capital equipment in Yuan, and so on.  The Chinese Government retains the U.S.$ it effectively got by printing Yuan (indirectly printing U.S.$) and buys U.S. government backed Treasury Bills or other securities.

Not everyone – including Wall and Bay Streeters –focus on the quantum of $U.S. held by the Chinese government, and the possible consequences of this.  Personally, I believe China’s accumulation of U.S.$ equivalents likely is a world changing event.  This massive amount of U.S.$ will enable the China to build infrastructure, further their internal economic development, and acquire assets outside China that China considers strategic.  This in circumstances where the Chinese ideologies are different from North American ideologies.

There is a very good article, with charts, available today on Brad Setser’s blog – click here.  I strongly suggest you read Setser’s article, particularly if you are not familiar with the extent of China’s U.S.$ reserves.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. No check of data underlying articles or comments referenced herein has been made, and no responsibility is taken for them.  See Legal Disclaimer.

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