What Happens when China Quits the Dollar Habit?

Bill Bonner - Thu 11 Mar, 2010

The American economy has apparently peaked out. Its labour is too expensive. Its consumers are tapped out.

Mumbai, India

Yesterday was another dull day on Wall Street. The Dow rose 2 points. Oil held at $81. Gold didn’t move enough for us to remember, one way or another.

The recovery continues... or so says the mainstream financial press. But the economy is still losing jobs... and people are still getting poorer.

NEW YORK (CNNMoney.com) -- The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday.

The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.

The American economy has apparently peaked out. Its labour is too expensive. Its consumers are tapped out. Its government is going deeper and deeper into debt, with no way out. In other words, the US economy is yesterday’s news.

We’re here in Mumbai learning more about tomorrow’s news. We sat down with a group of 12 analysts trying to understand what is going on in India, generally. Of particular interest was Tata Motors... Our investment team at the family office recommended it last year. It went up 468% over the last 12 months...

“Sell it now,” said an analyst here who follows the automobile sector.

You see the Tata name everywhere here in India. Autos, (the family owns Jaguar) coffee shops, hotels, insurance, airlines, chemicals – you name it. Tata seems to own the whole country. Just about everything seems to have a Tata company behind it.

But who is behind Tata? The company is run by Ratan Tata, graduate of Cornell and Harvard, who is unmarried. With no children.

“The family is part of a tiny minority in India,” a colleague explained. “They are Zoroastrians... which we call Parsees. They are a disappearing group because they don’t believe in getting married and having children. And if a Parsee marries a non-Parsee neither of them can continue to be a Parsee.”

They sound like the Japanese. On the road to extermination. But this dead-end is peculiar to the Indian Zoroastrians. Other groups of Zoroastrians accept converts... some even recruit them.

The word ‘parsee’ or ‘parsis’ was the term applied in the state of Gurajat, in Western India, to anyone coming from Persia. The Zoroastrians were originally from Persia, where they were pushed out by the Muslims. Now, they are a small religious minority, with a few recruiting centres... including one in Los Angeles.

“Parsees believe in playing an active role in the world. They fight for good against evil and try to establish order against chaos,” says our informant.

We don’t like to criticize anyone else’s religion, but it sounds a little flat to us. Where are the body thetans? Where’s the crucifixion? Where’s the bread transformed into the body of the saviour? That’s probably why the Zoroastrians have lost market share. Not enough magic and mystery.

But we’re not here to improve the world’s religions. In fact, we’re not here to improve anything. We’re just watching... wondering... and waiting for the next absurd thing to happen.

Hey... here’s something. Page one of the Times of India. It says that the president of France and his new wife, Carla Bruni, are both having affairs. The president is said to be doing a little hootchi kootchi with his minister of ecology. And if you believe the report, the first lady of France is now living with another guy.

Oh well... those French!

Back to our beat... money. Money doesn’t cheat. It doesn’t lie. It doesn’t run around. It is interdenominational and ecumenical.

Well... real money doesn’t cheat. You can trust gold. On the other hand, those paper dollars, euros and rupees are completely faithless. They say they’re worth a certain amount one day. The next, it’s a whole ‘nuther story.

Lately, the dollar has been doing well. The bond market has held up... despite the extraordinary demands placed on it by the world’s governments.

In February alone, the US government ran a record deficit of $221 billion. And February is a short month. Annualize that and you’ve got about $2.5 trillion in excess spending.

That money has to come from somewhere. And even if you took 100% of America’s savings... it still wouldn’t be enough.

If you’re married to the dollar... it’s time to see a divorce lawyer.

More thoughts, after this intriguing profit idea...

“The Chilean port town of Chacabuco is facing disaster. For the past year, a deadly virus has been destroying the town's main industry, salmon farming. Fish stocks have been decimated. And more than 6,000 people have been let go at the towns packaging plant.

“It’s the same story in towns all the way along the Chilean coast. An outbreak of an influenza-like virus called Infectious Salmon Anaemia has brought the Chilean salmon industry to its knees - literally choking the fish in their farming pens as it attacks their red blood cells. A mass cull of fish stocks has left it 70% smaller than the year before.

“And what happens in Chile has a huge bearing on this industry. Chile is the world's second largest producer of farmed salmon after Norway. And a market that has been in oversupply for nearly a decade is suddenly facing a shortage. The price of salmon has hit a record high - you've probably noticed it at your supermarket.”

That’s an opportunity for investors, reckons Riccardo Marzi: “Because while Chile suffers, one salmon farmer is looking at a bumper year in sales.”

In fact, Riccardo has just named a listed company that he reckons can make you a quick 30% gain from this “salmon flu”. He revealed it this week to readers of his Events Trader service.

You have time to get in. Riccardo is looking for the share to pull back a little from its current price. If you like the sound of this “off the radar” idea, check out Events Trader now. You’ll gain access to all Riccardo’s current trades. I guarantee you won’t have seen a service like it.

Click here: Events Trader

Events Trader is a regulated product issued by Fleet Street Publications ltd. Forecasts are not a reliable indicator of future results. Commissions, fees and other charges can reduce returns from investments. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek advice if necessary. 0207 633 3600.

And more thoughts...

*** China says it is continuing to buy US bonds “every day”. It doesn’t have much choice. It earns money by selling things abroad. In fact, exports in February were up more than 40% over February ’09. This leaves it with a lot of foreign money – most of it in dollars. What can it do with so much money?

China has quietly bought stakes in America’s leading companies... and in various businesses all over the world. But the only way large amounts of US dollar cash can be readily and safely deployed is in US bonds.

That said, China could also cause one helluva problem for the US if it ever chose to do anything else.

No worries on that score, said the Chinese official in charge of its $2.4 trillion worth of foreign reserves. He says China’s holdings of US debt are normal and that there is no intention of reducing them or playing politics with them.

He surely means it. And when the dollar goes down... and when the market turns, and China feels compelled to get rid of its US bonds, he’ll be totally sincere when he explains that to the international financial press too.

Markets make opinions, as they say on Wall Street. The market in bonds and the dollar has been very good for a very long time – since 1983, to be exact. As a result nearly everyone – including the Chinese – are of the opinion that US bonds are a safe place to be. When the market changes, so will opinions.

So far, no problem. But there’s no telling how long the foreigners will continue to support the dollar. Then what? Well... it leaves quantitative easing... in which the US central bank lends the money itself. Where does it get the money? It just invents it.

Which is why you can’t trust paper money. You have a dollar. You have it. You hold it. And you expect to keep it ‘til death do you part. But then, along comes another dollar that looks just like it... fresh... young... full of vim and vigour. So why not? Everybody does it.

Pretty soon, there are a lot more dollars running around. And they change hands fast. In economists’ lingo, the velocity of money goes up... and the value of the dollar – like a faithless lover – goes down.

*** We live comfortably in the Taj Mahal hotel. The hotel is a refuge of civility and dry air. It has restaurants, shops – there is no reason to leave it.

The hotel may still be a terror target. But even if it is occasionally attacked, life in the Taj is still preferable to life outside.

What was Mumbai like before air conditioning? We can’t imagine. Drippy. Sweaty. Grimey. The city was probably uninhabitable... like Houston in the summertime. This morning, the air is so heavy and humid, we didn’t need to take a shower... we just walked from the hotel to a waiting car.

Outside, people walk around... they work... they talk... they sleep on the pavement. At the office, men work on a wood scaffold. One sings merrily... an Indian tune with no apparent melody. How do they do it? How do they support the heat and the damp? Perhaps some Darwinian adaptation makes it possible.

“What are you talking about,” asked a colleague. “This is the cool season. You should come back in the summertime.”

Until tomorrow,

Bill Bonner
For The Daily Reckoning

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