Could it be that Bernanke is scared and he thinks that others should be as well? Could it be that he is one of the few seeing that the Asians have the Americans by the cajones?
(See article below.)
http://www.resourceinvestor.com/pebble.asp?relid=35491
Gold, a U.S. Recession & China's 'Nuclear Option'
By Stephen Clayson
10 Sep 2007 at 12:55 PM GMT-04:00
LONDON (ResourceInvestor.com) -- Whoever coined the phrase ânuclear optionâ to describe the power that China has over the fate of the U.S. dollar hit the nail right on the head.
With its sustained, massive and calculated purchases of U.S. treasuries, China, along with other East Asian central banks, has held the dollar steady at around the parity it has traded at since 2003 in the interest of maintaining U.S. demand for imports.
So it follows that by bringing these purchases to an end, China, or one of the other bulk holders of dollars and dollar securities, could give the dollar the final push towards the edge of the cliff that it has been slipping inexorably towards.
While China is the biggest holder of dollars, with foreign currency reserves of over $1 trillion mostly in greenbacks, the central banks of South Korea, Japan and Taiwan are also big holders. Only one needs to make a break for the exit before the others follow suit, as the last one left holding his dollars ends up taking the biggest loss.
How steely are the nerves of the Chinese? Are they likely to abandon the dollar now, judging that a recession in the U.S., which could perhaps precipitate a move by one of the other big players at the table, will bring the down the currency anyhow?
It is a possibility, and there is speculation that the Chinese themselves have begun to sell down their U.S. treasuries. If these sales reach a critical mass then the race may be on, especially if the Chinese start putting the proceeds of these sales into currencies other than the dollar.
The dollar is already under pressure. Last week, economic data from the U.S. indicating that the sub-prime crisis is starting to make its mark on the wider economy, with some people even suggesting that a recession is in the offing, caused the dollar to lose value and gold to appreciate above $700 an ounce for the first time in over a year.
More of the same can be expected later this month when the U.S. Federal Reserve cuts interest rates, as it seems likely to do. And if the economic picture in the U.S. continues to worsen then the trend will only continue.
The phrase ânuclear optionâ imparts a false maliciousness to any decision by the Chinese to get out of the dollar. It is not in Chinaâs interest to do undue harm to the U.S. economy, as the U.S. remains a huge consumer of Chinese goods and any fall in the dollar only serves to make these goods more expensive to U.S. consumers, as well as to worsen economic conditions by stoking inflation.
But by holding onto its dollars China is only leaving itself open to a monstrous loss as the dollar depreciates, as it will at some time or another. The U.S. trade deficit is unsustainable, and that is the bottom line. For sure, some economies consistently run large trade deficits, but never to such an enormous extent as is the case with the U.S. economy.
With the advent of the Eurozone as a rival economic bloc and the resurgence of China in the world economy, the U.S. will not be able to carry on funding its trade deficit, so the dollar must fall to bring things back into balance.
And the proven inverse relationship between the parity of the dollar and gold means that $700 an ounce may be only the first of multiple barriers to fall for the gold price.
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