Bond Outlook [by bridport & cie, April 5th 2006]
| Fault line II, the Chinese support of the USD or withdrawal thereof, was strongly highlighted this week. It sufficed for a Chinese parliamentarian, with no official policy making authority, to muse publicly on reducing USD support for the dollar to decline against the EUR. We would suppose that such speeches are rigorously planned and authorised in a country not strong on freedom of expression, and that they are part of the controlled weakening of the USD being orchestrated by the Chinese Government. When US Congressmen demand that market forces should determine currency exchange rates, they should be very careful what they wish for. If China and Japan were not buying T-Bonds out of a political decision, the dollar’s fall would become a debacle. How ironic that the currency of the greatest capitalist power be controlled by the world’s greatest (nominally) communist power. Be grateful indeed that China’s communism is only nominal! |
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| The widely held view that China cannot afford to pull the plug on the USD because it holds so many of them and depends on US buying power is reassuring, but only up to a point: plugs can also be pulled briefly and put back over and over again to empty the bath bit by bit. |