U.S. Treasury Secretary Henry Paulson is headed for confrontation with a Democratic-controlled Congress over China trade.
We warned of this in yesterday's Financial Intelligence and see serious problems ahead.
The U.S. government now has the very tough job of explaining to the U.S. Congress and citizens that, with some $700 billion in liquid dollar assets that it could liquidate, China holds the trump cards in trade negotiations with America.
Worse still, as we warned in Financial Intelligence (Nov. 9, 2006), China can now effectively dictate terms to the U.S. government and even exert undue influence over U.S. internal affairs, such as the Federal Reserve target interest rate.
Despite the growing evidence, this calamity still goes largely unreported in the main stream American news media.
The awful yet largely hidden reality is that China already holds the cards in the massive international currency battle looming over the U.S. dollar and, through it, over U.S. interest rates. But many appear to stick their heads in the ground and ignore it.
Winston Churchill once observed that those with their heads to the ground place their bottoms in a most vulnerable position.
Bloomberg also reports today that Swiss political science professors, Simon Evenett and Michael Meier found that six Senate seats and 16 seats of Representatives were lost to candidates supporting trade sanctions against China.
An yet, China has only to hint of an intention to liquidate even a small percentage of its dollar holding to send the dollar tumbling even from its present depressed levels.
Bloomberg also quotes the comments of some leading Americans on the issue of U.S.—China trade. To some observers, they will sound as if they have come from a different planet of make-believe nostalgia for the "good old days of American dominance."
The AFL-CIO is reported to have contributed some $40 million to help the Democrats win control of Congress. Speaking of China, their executive director, Robert Baugh, said, "They (the Chinese) are going to get exactly what they deserve from Congress." How money talks when an un-elected person can speak on behalf of the American Legislature!
Democrat, Sander Levin, (Mich.) alleged that Paulson's policy towards China, "confirms the fact that China has been controlling their currency to gain a major unfair advantage in its trading relationship." Of course, he is absolutely correct. But, he appears to have forgotten the old adage that, "Nothing's fair in love or war." What few realize is that, as far as China is concerned, this is "war."
Even Republican Representative Donald Manzulle (Ill.) is reported to have said, "The Democratic Congress is going to be a lot more fueled to do something dramatic against China." If the U.S. Congress does get "fueled" against China, to where does he think the U.S dollar will fall or that interest rates will have to rise, or what the effect of such tightening will be upon an already uncertain economy?
One has to wonder what such important people think about before they make such statements. Worse still, if they are not posturing, but actually believe what they say, one has to wonder how much they even remotely understand of the true nature of world affairs.
It is all very worrying and goes to show just how difficult a job our government and particularly Treasury Secretary Paulson and Fed Chairman Bernanke will face in 2007.
In short, they will have the daunting task of facing the U.S. Congress, the American people and even the millions of foreign holders of U.S. dollars (Eurodollars) with the awful reality that, within reason, China already effectively controls U.S interest rates!
Such a revelation, as yet unreported in the mainline media, will come as a great shock to many people and nations.
We believe this awe-inspiring realty will dawn early in 2007. Hence our consistent advice to our financially conservative readers/investors, that they accumulate gold and to keep bond investments short.
We feel sure that almost all our readers will sincerely wish both Paulson and Bernanke a happy New Year.