Monday, September 14, 2009

China...effectively declares war on US and Obama taxes Tires?

To start out, this situation is much bigger than trade. When you read the headline, that is not what i am referring to. China and the US in a trade spat would be relatively meaningless. China can inflict relatively little damage on the US with trade sanctions and vice versa. That's not to say there would not be damage from these types of actions. But there are bigger problems.

I believe that markets are not news driven...though news can be a catalyst to reflexive market price reactions. I do believe though that markets are credit driven. A china trade war does not impact credit directly...and therefore, itself, is not a great excuse for the market to selloff or rally. 

However, what has happened recently as illustrated in my recent posts, is that the conflict between the US and China has escalated rather than defused regarding China's authorization of defaults on derivatives agreements that could collapse our entire financial system in very short order. 

China is a counter-party to trillions of dollars of derivatives obligations with JPM, GS, BAC, C etc that they have threatened to default on. This is the main issue going on right now - trade is just a smoke screen. Any affirmative moves in this direction, would create credit issues and trigger the need for huge amounts of cash to be raised very quickly. Obama, in his typical wisdom, decided the best way to prevent China from pursuing their defaults agenda, and thus collapsing the JPM 89 trillion ponzi scheme derivative portfolio (and GS and C portfolios as well) was to add a tariff to imports of tires from china...

China answered back...but this escalation overall raises the stakes and makes it that much more likely that JPM, GS and C will not get paid by China...If China's business with the US is collapsing, why do they need to continue to pay derivative obligations on which they are losing significant sums and on which they believe they were hoodwinked? The upside is too great for them not to do so. If they have little business with us and get into a trade war, why not make a ton of money on their treasuries and long dollar positions by collapsing the theoretical dollar caches that the largest banks have been using to further a bankrupt and corrupt system. If China were to follow through with this (which we can not control), the result WILL collapse the entire US financial system. Additionally, it would enable China to hijack our system by leveraging the strength of the dollar purchasing power (derived from their treasuries and long dollar positions) that they hold. This would work, provided that interest rates remained low. Given the fear of further deflation in bank owned assets and misguided policies from the Fed, it is highly unlikely, even in this case, that US officials or banks will be in a rush to raise interest rates. Rates will likely remain low in an attempt to manage and contain deflationary pressures. 

Effectively, what has happened is that china has suggested they were thinking about declaring war on the US - and the best Obama could answer was - "OK, we are going to tax your Tires"...this situation is much bigger than trade.
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