Friday, July 11, 2008

Friday Addendum

And one more thing....

Friday Addendum
Most of the time I am behind the curve with information, mostly due to the fact I am at work all day. Tonight Mish has a great post up about who exactly holds the debt of Fannie and Freddie. take a look at this post:
http://globaleconomicanalysis.blogspot.com/2008/07/us-taxpayer-bailout-of-china-over.html

I mention it because it has long been a central tenet here at Economic Disconnect that the Chinese watched and learned from the former Soviet Union's failure, and have applied those lessons. If FNM needs a big bailout, I argued that Taiwan would be the price for America to pay. Full post here from October 16th 2007:
http://economicdisconnect.blogspot.com/2007/10/terrifying-tuesday.html

Here is the relevant excerpt:
Revenge of the Communists
It is generally accepted that the USA won the Cold War with the Soviet Union, not through live combat, but through an ever escalating arms (Not those ARMS!) race that eventually bankrupted the old Soviet system. I do not want to debate the particulars of that story. I want to focus instead on what could be happening in a macro geopolitical sense.
Suppose you were a communist country, and saw what happened to the old Soviet Union. Perhaps you would learn that isolation from foreign trade really hurt them, and a weak economy meant ultimately they were doomed. Say you instead become a massive creditor to the United States. Your country, with terrible environmental rules, no worker rights, a police state that cracks down on dissent, and dirt cheap labor can manufacture every widget needed by the USA. Your economy is booming, and what's even better, you hold a silly (upwards of 2 Trillion?) dollars of US debt. Even sweeter, the US is totally dependant on your country continuing to buy their debt. So far so good.
Now the dollar is tanking badly. The US consumer has spent himself silly buying homes that moved in price like the old dot com stocks. The party is now ending, and massive financial losses are sure to come. The US is in a bad spot with huge budget deficits, massive entitlement programs, and facing a probable bank bailout on a historic scale.
By now you know the country is China. Faced with this tantalizing junction in history, what would be your next course of action?
Option1: Nuclear Option
China stops buying US debt causing a run on the dollar, and a major meltdown in US markets. A new smarter communism has crushed the US economy and exacts revenge for the loss in the 1980's.
Option2: Trading Time
Faced with the above mentioned nuclear option, the US signs a treaty of non aggression with China, and Taiwan is left to its own devices under a Chinese invasion. The US will sell out Taiwan in the face of such a catastrophe.
I do not want to have a debate on the merits of Taiwanese Independence, that's not the point of this thought process. I want to point out that because of the major Economic Disconnect that has gone on too long, neither of the two ideas floated here are beyond consideration. By all means, let me know what you think. Again, I hope I am very, very wrong.

It is getting scary. Be mindful.

6 comments:

watchtower said...

This was kind of like reading J.R. Nyquist, and yeah, like Nyquist's posts, it's kind of scary.

Anonymous said...

I might be wrong but I think one of the biggest group of shorties of these two's stocks is in fact the bond holders in an attempt to get that explicit goverment guarantee. The equity holders are usualy the dumb money in this kind of enviorment.

Kevin

Anonymous said...

Russia, a holder of about $100 billion in U.S. agencies' debt, including securities of Fannie Mae and Freddie Mac , said on Saturday it was happy to hold the debt and had no immediate plans to reallocate

http://www.reuters.com/article/bondsNews/idUSL1252411520080712

Maybe Russia will just settle for getting Alaska back.

Kevin

watchtower said...

"Maybe Russia will just settle for getting Alaska back."

That's a good one Kevin.

watchtower said...

"Actions do not lie. America is China’s main enemy, and according to Gen. Chi’s secret address, China’s key strategic problem is the issue of America. “First,” noted Chi, “if the United States is firm in blocking us, it is hard for us to do anything significant to Taiwan and some other countries.”

"The strategist sees the big picture. He recognizes the main obstacle. He devises a strategy to remove the obstacle. What do you think that strategy suggests about the U.S.-China trade relationship? What will the Chinese inevitably do with all their dollars?"

CHINA'S ECONOMIC STRATEGY
by J. R. Nyquist

http://tinyurl.com/23uop4

Having an 8 year old daughter I have to say that I hope this turns out to be over the top rhetoric.

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