“How do you deal toughly with your banker?”
- Deal toughly?
- Half of all tax receipts
- Investment implications
Like many news items out there today, the subject line of this email is seriously disturbing...but not surprising. If you get my meaning...
It’s a quote from our Secretary of State Hillary Clinton. She’s referring to China as our “banker” in a discussion with then-Australian Prime Minister Kevin Rudd.
I should clarify, that this quote comes courtesy of one of the latest rounds of Wiki-leaks - so, I guess that takes some of the punch out of it.
But let’s pretend for a minute that Mrs. Clinton actually made this comment. Even if she said it in jest (which from the context of the original conversation seems unlikely) it really is disturbing.
It’s disturbing to think that this country has come so far, to the point that our Secretary of State recognizes that our diplomatic efforts are SEVERELY hampered by our sovereign debt levels. If that’s not a signal to ditch the dollar for commodities, then I don’t know what would be.
However, this China problem is something that I think needs to be addressed publicly by our leaders - in an honest and straightforward fashion. I don’t want to hear anymore weak-sister threats, limp-wristed non-statements and dim-witted denials from Timmy Geithner or Ben Bernanke.
We owe $884 billion to China. Somebody in the Government needs to come out and say it loud and proud. They need to address it. They need to outline a clear plan for rectification.
$884 billion amounts to a smidge under half of the Federal Government’s annual tax receipts. What’s their plan for getting us out from underneath all of this debt? The fact that we don’t hear a plan signals to me that we don’t have one.
We can’t rely on China to simply smile and wait to get paid back in devalued dollars. They will start to demand higher interest payments if we expect them to fund anymore of our debt. They may start to use any dollar strength as a time to rid themselves of their Treasury holdings.
They certainly don’t want to be holding a bag filled with worthless paper in the likely event of higher inflation. China along with Japan has the unique ability to crash Treasury prices if they want to, or if they feel sufficiently threatened that their holdings will be worthless.
There are already murmurs of default in the Euro-zone. I doubt China will be as cordial as they have been if the “D” word passes the lips of American sovereign debtors.
So the Secretary of State sees our debt obligations as a major hindrance to foreign policy. But there’s not even a notion that these debt obligations will ever be tackled head on.
If the debt is such a liability, the only rational course of action from a utilitarian, or Machiavellian Head of State perspective would be to string along creditors for as long as it’s expedient. And when it’s no longer expedient? Default.
The investment implications are clear as crystal, but I’ll repeat them: trade in dollars for commodities while you still can.
If you’re interested in my favorite commodity investment of the moment, I recommend taking a look at a report on three small cap silver companies that my boss Ian Wyatt just completed. Click here to read this report now.
Good investing,
Kevin McElroy
Editor
Resource Prospector
Disclosure: long gold and silver
