China and US Treasuries

China has warned the USA to maintain the value of the USD 'or else'.

It's a warning shot across the bows. China is worried that too much QE will devalue the currency, as a result of monetary inflation. The USA is in a horrible pickle right now; China is in a position to bring the USA to her knees, if she wanted to. Would the Chinese want to?

Do the Chinese prefer to work in factories, often no better than sweat-shops, or rake-over piles of European refuse for recycling, to keep the US and EU citizens in the comfort to which they have become accustomed? One hopes that they realise their station in life and being merely Chinese they should be glad of the opportunity to serve their betters. Some people say that the Chinese are getting fed up with it and would like to spend some of their own hard-earned that is presently being used to prop-up western economies. If they tried to do that there would be a run on treasuries that would make the Dutch Tulip Bubble and Dot Com Bubble look like diurnal trading swings.

Greenspan likes to define bubbles as 'irrational exuberance'. If lending someone hundreds of times more than they could repay in several generations isn't 'irrational', I don't know what is! The flood of funds into Treasuries from other asset classes can fairly be described as 'irrational exuberance' so yes, we have a Treasuries bubble. The odd thing about bubbles is that most of us don't perceive them to be bubbles until they have burst....there is always some rationale such as "there's a shortage of land...", "people have to have somewhere to live so house prices will always rise in the long term and at most will only fall back a few percent.....". The thing about houses is that at least you own them (unless they are mortgaged). People just refuse to sell until they have to, and that makes the decline slower. Treasuries, on the other hand, are simply an IOU. If 'I' looks as though he might default on paying 'U' then U want out, and out fast. Or if 'I' decides to repay 'U' in a currency that has devalued by x%, again U want out.

I don't believe that the Chinese want this. What the Chinese (and almost everyone else) want and are working towards, is a return to 2006/7. They want to turn the clock back. Quantitative Easing is about resuming lending, trying to turn the clock back. In my opinion that is unlikely to happen.

I think that we do have a Treasuries bubble and that it is about to burst. Cash or gold are good places for the proceeds right now unless you have the risk-appetite for very dodgy debt?