Friday, June 12, 2009

The sexual frustration of dots waiting to be connected

Why can’t the mainstream media connect the dots when reporting on the economy? The dots sit there, throbbing, screaming, “Connect me! Connect me!” and like a blind geek in a strip club, the media ignores the dots.

Yesterdays New York Times headlined a story, “China Fills Its Pantry With Global Commodities." The story told of “90 large freighters full of iron ore…idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing.”

Then the story asks why, with all this iron ore waiting to be offloaded, is Chinese steel production so weak.

Then the experts chime in. Steel production won’t pick up until the global economy recovers; China is trying to rebuild inventories that were “drawn down during autumn and winter.” Others see the purchases as an indication that China believes that the economy in the United States and Europe are recovering.

In addition to steel, China is also buying as much aluminum, copper, nickel, tin, zinc, canola, soybeans and oil as it can lay its hands on.

For the real answer to the question why, we have to turn to Peter Lee of the Asia Times, who points notes that “ [China] doesn’t want to be under the US gun and be forced to buy Treasury bills to finance a yawning deficit simply because Beijing has no place else to put its money. So China is looking for options.”

Conventional wisdom in the United States clings to the belief that China will be forced to finance our deficit because, if it doesn’t, the value of the dollar will plunge and will trash the Chinese economy, which is why China can’t afford to dump the dollars it has.

This is the same conventional wisdom that said housing prices would continue to rise indefinitely.


What do our geniuses think China is doing with its massive commodity purchases? It's dumping its dollars by converting them into commodities. It’s a win-win proposition for them. The faster China buys up hard commodities, the more their price will increase, and the more the value of the commodities they hold will increase.

China is also talking to the IMF about buying bonds denominated in Special Drawing Rights (SDR) that represent a fiat basket of currencies, in which the dollar only accounts for 44% of the value, and is offering to buy 400 tons of gold from the IMF. (At $950 an ounce, my calculator doesn’t display enough zeroes to compute how many dollars the Chinese could dump with that purchase.)

Lee connects the dots nicely when, speaking of SDRs, he says:

Despite professions of bafflement and scorn from Western economists, the prospect of SDR bonds has elicited strong interest from all the BRIC countries, especially Russia—an indication that people who actually run economies rather than simply talk about them find the SDRs a potentially valuable and significant development.

Perhaps that’s the Times problem, it talks to too many people who simply talk about the economy. Whatever the reason, there are a lot of frustrated dots waiting to be connected.


Cirze said...

You can try to tell them, but no one's listening.

Unless they already know and agree.

Good reporting!


What do our geniuses think China is doing with its massive commodity purchases? It's dumping its dollars by converting them into commodities. It’s a win-win proposition for them.

Case Wagenvoord said...

It's entirely possible they know exactly what China is doing but are keeping their mouths shut for fear of spooking an already spooked stock market.

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