China and the Economy of Derivative

The simplicity of finance and economics is masked by illusion of complexity.  Creating a language and device all its own is the methodology applied by the architects of advantage who have learned, by generational adventurism, that the further away from substantive practices you go the easier it becomes to conceal the truth.  Or, paraphrasing Joseph Goebbels own words, “…the lie repeated often enough becomes the truth.”

The simplicity of Economy is to consider the concept at its most basic; after all, that’s precisely what it is, basic.  Economy is the interchange of “demand in search of supply” and the interplay of these two components with one another. Finance is, quite simply, the “medium” used to balance the inequalities of “demand” and “supply”.   This “inequality” is balance by the use of a “medium”, a process occurring constantly.  The following is fairly universal example of this process in action:

  • An employee provides his/her “supply” of hours in exchange for an employers “demand”.  The employer has nothing that the employee might exchange his “supply” for so the “medium” used, in lieu of some other exchange, is represented by the money he accepts in exchange for the Employers “demand” for the services the Employee provides. This interplay enables the employee to exchange his “demand” for the “supply” of, for example, groceries and the advantage of money (as the “medium”) enables the purchase of groceries largely because the Grocer is likely to have no interest in accepting the exchange of the employees “supply” of time.  Pretty straight forward.

This concept illustrates the supreme simplicity of Economy and Finance and whether it is an automobile, groceries, a home or medical services this illustration applies.

Enter in to the equation the concept of currency, more specifically “banking” and we discover a pure departure from the basics of economy largely due to two fundamental components, “interest” –  the cost associated with the “demand” (or need) for using some other entities “supply” of currency.  The entire concept of Banking, as it has been practiced for nearly one hundred hears,  has fueled its income stream from the “cost associated with the ‘demand’ (or need) for….” the use of their “supply” of currency.  The second “fundamental” which one may not be aware of is that this “supply” of currency costs the Banking System absolutely nothing to create! Again, unlike your cost as an employee being your supply of “time” or the auto manufacturer the cost of manufacturing an automobile, currency costs absolutely nothing!  It’s a very lucrative business!

Now, what does this have to do with China?  I thought you would never ask!  China’s entire economy, its entire explosive economic growth has been fueled by massive infusions of cash, from outside “suppliers” of currency in search of great and greater “demands” where it can and has charged “interest” for its use.  This “use” has been applied to creating massive economic/industrial capacity whose “output” (supply) is exchanged, you guessed it, for even more “medium” then exchanged for your “demand” (your iPod, your jeans, your whatever “made in China”) which you met by surrendering your “supply” of “currency”!   Now, if you’ve an insufficient “supply” of currency, you use the Banks “supply” of currency for which you pay them “interest” on money you don’t have for “currency” that costs them nothing to create!  A very lucrative business, oh yes, I’ve already said that.

Why the use of the term “derivative”?  Simply this: a “derivative” is an “instrument” (or certificate) whose “value” is based solely upon the belief, by the party or entity who receives or accepts, that this “instrument” has value.  That’s it, that’s all there is to it – the entire global derivative debacle is based solely on the trading of “instruments” that have no, absolutely NO inherent value but that which the “market” says that it has.  This is what your Tax Dollar “bailed out”!

With these thoughts in mind, consider the following summary observations:

  • The Chinese are smart enough to know that there massive “supply” of currency has been accumulated from a “supply” (the Western/U.S. Banking System) that may, with an “accidental stroke of a key”, completely slice the value of its “supply”.  Now you know why the U.S. is so interested in persuading the Chinese to permit the Yuan to “float” in value against the Dollar.
  • The Chinese know that the U.S. Economy is a beached whale and is quickly exhausting its ability to feed the Chinese Economy with an every expanding “supply” of “currency”.  It is important to know that it is entirely likely that the Chinese realize they no longer have a need to accept more of this “supply” –  they also would enjoy the benefit of persuading other Nations to feel the same way.  The U.S., at this point, has nothing the Chinese need.  We’ve supplied them with industry, technology, infrastructure and global economic standing.  You have the Congress of the U.S. Government to thank for that.
  • The Chinese Trade Surplus with the U.S. is inevitable – the U.S. exports “bails of hay”, “scrap metal”, “intellectual property” and imports finished goods.  Truly, what do you expect?
  • The Economic Derivative in play is the amount of “U.S. Debt” the Chinese hold which at the moment is hovering around $1 Trillion.  If Geithner can coerce the Chinese to let the Yuan float and this currency gains against the dollar a 10% gain in the Yuan represent a 10% drop in the “replacement cost” (for the U.S. Treasury) in the value of the U.S. Debt held by China. Knowing the global currency markets as I do, rest assured that a sudden plunge of 50% is not at all impossible.   Track the performance of the Euro if you want an example.

The tragic mistake that is being made is to believe that the Chinese care about what happens to the U.S. Economy or the Nation – to them, it couldn’t matter less.  Privately, the Chinese laugh at the like of Timothy Geithner, Barrack Obama and Hilary Clinton.  To them, these are mere charlatans in the face of a Chinese regime that operates on a completely different plane of thought, action and ethos.

The Chinese have nothing to loose because the U.S. has surrender its advantage of value!

The only way the U.S. will survive this contest is to not only out-maneuver China, this Nation will have to over-maneuver the Chinese in a game that this Country’s present regime is incapable of playing, at any level!

Curtis C. Greco, Founder

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